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Jamie Golombek: CRA’s reasoning for denying headhunter expenses full of contradictions, judge says

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Much of the discussion concerning the tax deductibility of employment expenses over the past three years has focused on what employees who have been working from home due to COVID-19 can write off on their tax returns. But it’s also important to remember that other non-reimbursed employment expenses, beyond those related to your home office, may also be tax deductible.

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To be entitled to deduct employment expenses, you’ll need to get a copy of a properly completed and signed Canada Revenue Agency Form T2200, Declaration of Conditions of Employment, on which your employer has certified you were required to pay various types of expenses for which you will not be reimbursed.

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You’ll also need to complete and file a copy of Form T777, Statement of Employment Expenses, with your tax return. This form lists examples of potentially deductible employment expenses, which can include: accounting, legal, advertising and promotion fees; allowable motor vehicle expenses; certain food, beverage and entertainment expenses; out-of-town lodging expenses; parking; and postage, stationery and other office supplies. But this list is not exhaustive, and, occasionally, the CRA may challenge your claim if a particular expense is unusual, large or not on its list of traditional employment expenses.

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That’s exactly what happened in a recent tax case involving a Quebec wealth-management adviser who was employed at a major bank-owned brokerage firm from 1997 until her retirement in 2019. The taxpayer during her testimony described the nature of her work, which included assessing clients’ needs, investing their money and estate planning. Although the taxpayer resided in a small town about an hour’s drive outside Montreal, she had clients throughout Quebec, as well as in Ontario and Nova Scotia. As a result, she incurred travel expenses that were not paid for by her employer, and which the CRA fully allowed.

In 2015 and 2016, the adviser reported commission income on her tax returns of $538,388 and $527,077, respectively, and deducted employment expenses of $31,051 in 2015, and $39,435 in 2016.

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Canada Revenue Agency's headquarters in Ottawa.
Canada Revenue Agency’s headquarters in Ottawa. Photo by Justin Tang/The Canadian Press

The CRA allowed the majority of her employment expenses, including promotional, motor vehicle and travel expenses, but it denied costs she paid to a headhunter to help find an appropriate associate adviser to join her practice. Specifically, the CRA denied $11,112 in 2015 and $10,606 in 2016.

By way of background to justify the headhunting fees, the adviser explained her performance evaluation was based on several things, the most important of which is the amount of commissions she earned, which was primarily based on bringing in “net new assets.” She stated her net new assets during 2014 and 2015 were “clearly insufficient.”

At that time, she concluded that if she wanted to achieve the performance expected by her firm, she needed to hire an associate adviser who could share her duties and canvass for new clients. This was confirmed by her brokerage branch manager, who testified that when an adviser’s clientele becomes larger, it can be difficult to ensure the quality of services, and that in these cases the firm suggests senior advisers hire associates.

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To this end, the brokerage firm posted the associate adviser position internally, but the posting produced few candidates, so the taxpayer was asked to search on her own. It was at this juncture that she decided to hire a search firm to find a suitable associate to join her team. That new associate adviser joined in October 2017. Documents produced in court showed that the hiring allowed the adviser’s commissions to grow by increasing net new assets to the firm.

The CRA denied the adviser’s cost to hire the search firm, arguing the taxpayer wasn’t explicitly required under her employment contract to pay the headhunter expense. The CRA said the taxpayer should have gone through the internal recruitment process and selected someone from that list rather than using her own headhunter.

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The judge found this to be nonsensical: “This seems illogical to me since (the brokerage manager) confirmed that the internal process … had not been productive.”

The judge also said the CRA was somewhat contradictory in its approach toward the taxpayer’s employment expenses. The CRA clearly acknowledged the taxpayer “had to incur most of the expenses,” and allowed all of them except for the executive search firm fees on the basis that the taxpayer was not required to incur “this” expense. Furthermore, the CRA admitted during questioning that its argument was essentially that the employer’s requirement to pay “other expenses” was not specific enough to include headhunter expenses.

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The judge disagreed. She turned to Question 1 of Form T2200, which indicated the adviser was required to pay the expenses incurred to perform the duties related to her work. “In my view, this is sufficient to conclude that the (taxpayer) meets the condition set out in (the Income Tax Act)” to deduct employment expenses, the judge wrote.

Finally, the CRA attempted to argue that the fees paid to the headhunter were capital in nature and, therefore, not deductible. It argued this on the basis that it was a one-time expense. Again, the judge disagreed and concluded the costs incurred in finding an associate adviser were current expenses and not capital expenses.

Having met the conditions in the Tax Act to deduct employment expenses, the judge ordered the matter be sent back to the CRA for reconsideration and reassessments on the basis that the adviser is entitled to deduct the amounts paid in 2015 for 2016 for headhunting fees since they clearly fell within the expenses described as “business development,” and thus were expenses which the adviser had to pay and for which her firm provided no reimbursement.

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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You are unable to catch up on missed payments, experts say

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By Julie Cazzin with Brenda Hiscock

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Q: Help. I borrowed $15,000 from my registered retirement savings plan (RRSP) under the Home Buyers’ Plan (HBP) and have missed three years’ worth of repayments. What should I do now? And what penalties will I have incurred, if any? – Robert

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FP Answers: Robert, let’s look at how the HBP program works in general, and then address your question. The federal government’s plan allows you to use up to $35,000 of your RRSP savings ($70,000 for a couple) to help finance a down payment on a home for yourself or a related person with a disability. To be eligible for the program, you must meet the following criteria:

You must be considered a first-time homebuyer (you are considered a first-time homebuyer if, in the prior four-year period, you did not occupy a home that you owned, or one that your current spouse or common-law partner owned);

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You must have a written agreement to buy or build a qualifying home;

You must be a resident of Canada when you withdraw funds from your RRSPs under the HBP and until a qualifying home is bought or built;

And you must intend to occupy the qualifying home as your principal place of residence within one year after buying or building it (additional criteria need to be met if the home is being built for a disabled person).

In all cases, if you have previously participated in the HBP, you may be able to do so again if your repayable HBP balance on Jan. 1 of the year of the withdrawal is zero and you meet all other HBP eligibility conditions.

Once you have determined that you qualify for the program, you can withdraw a single amount or make a series of withdrawals in the same calendar year. However, you cannot withdraw more than $35,000 per person/spouse.

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Also, your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year. This is a very important point as some people mistakenly believe they can contribute to the RRSP, get the tax deduction and immediately withdraw the funds for the HBP. That is not the case.

To withdraw funds from your RRSPs under the HBP, fill out Form T1036, Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP. The withdrawal is not taxable if you repay it within a 15-year period. The payback amount is at least a 15th per year of the amount you withdrew from your RRSP.

Your repayment period starts the second year after the year you first withdrew funds from your RRSP for the HBP. For example, if you withdrew funds in 2022, your first year of repayment will be 2024.

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Robert, you have missed three years of HBP repayments and are concerned about penalties. In this case, it’s simple. If you do not make the annual repayment to your RRSP, you must include it as RRSP income on your income tax return. The amount you include is the minimum amount you must repay as shown on your Home Buyers’ Plan statement of account. Your HBP balance will be reduced accordingly.

The “penalty” is extra taxable income on your return for the three years the repayments were not made. You are unable to catch up on missed payments.

In future years, Robert, there is no real benefit in making extra repayments beyond that required when you make your annual repayment, since you are better off claiming any extra contributions as deductions (yielding a tax refund) rather than paying down your HBP balance quicker.

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If your RRSP deduction limit for the repayment year is zero, you can still contribute to your RRSP and designate the amount you contributed as a repayment under the HBP. These are not considered RRSP contributions. Therefore, you cannot claim a deduction for these amounts on your taxes.

For upcoming new homebuyers, it will be important to also consider the Tax-Free First Home Savings Account (FHSA). Starting in 2023, FHSAs will be available to Canadian residents who are 18 years old or older and have not owned a home in the year the account is opened or the preceding four calendar years.

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The annual tax-deductible contribution limit will be $8,000, up to a lifetime contribution maximum of $40,000. Unused contribution room up to $8,000 can be carried forward, and the plan must be closed after 15 years.

Funds withdrawn to make a qualifying home purchase are not subject to tax. Any funds not used towards a home purchase can be transferred to an RRSP or registered retirement income fund (RRIF) penalty free and tax deferred, without impacting the taxpayer’s contribution room. Withdrawals for other purposes will be taxable.

The major difference between the two plans is that there is no requirement to repay the FHSA. But you can use the HBP and the FHSA program when you purchase your first home.

Brenda Hiscock is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. She does not sell any financial products whatsoever. She can be reached at bhiscock@objectivecfp.com.

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Be cautious before entering into an agreement to chip away at your home equity

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By Sandra Fry

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Are you running out of retirement savings? Do you have a lot of debt, but your monthly income is too low to afford the payments? Or maybe you own your own home and want to access the equity. If you’re 55 or older, a reverse mortgage might seem like an attractive option.

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As with every financial choice, however, it’s important to carefully weigh the pros and cons of a reverse mortgage before entering into an agreement against your future home equity.

A reverse mortgage is a loan that allows you to access the equity in your principal residence without having to sell it and without having to make payments until you move out, sell the home or the last borrower passes away. There are two lenders in Canada who provide reverse mortgages: HomeEquity Bank offers the Canadian Home Income Plan (CHIP) while Equitable Bank offers reverse mortgages in a limited number of cities.

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Once granted, a reverse mortgage can provide a one-time lump sum of money, ongoing smaller amounts to top up monthly income from other sources, or a combination of both. It could be a good way for senior homeowners to age in place if they don’t have the income to support traditional mortgage or home equity line-of-credit payments.

The income derived from accessing your home’s equity is not taxable, so it will not impact your Old Age Security (OAS), Guaranteed Income Supplement (GIS) or any other income-tested benefit. You may also use the money for anything you desire, such as a trip, renovations, payments on non-mortgage debt (for example, credit cards or car loans) or medical expenses.

If all this sounds too good to be true, it might be.

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There are lending criteria that might make a reverse mortgage less accessible than a traditional one. Along with the 55-plus age requirement for all borrowers, everyone on title of the property must be listed on the application. The reverse mortgage can only be for a maximum of 55 per cent of your home’s current value and any loans, lines of credit or mortgages that are secured by your home must be paid off before the reverse mortgage is granted. Depending on your loan agreement, the lender may allow you to pay those secured debts off with the proceeds of the reverse mortgage. You must also keep up to date with maintenance, insurance and property tax payments.

Interest rates are typically higher than those on a conventional mortgage because the lender is gambling on the future value of your home. In terms of upfront costs, you will need to pay for an appraisal, as well as application and legal fees. A lender may insist you obtain independent legal advice before it grants the loan. And a prepayment penalty typically applies if you pay the mortgage off within the first three to five years.

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The biggest risk with a reverse mortgage is that the interest compounds and chips away at your equity. If you’re counting on using that equity to pay for medical costs or living in a senior’s care facility one day, passing it on to your heirs or leaving a financial legacy in your community, there might be much less money left over than you need depending on market conditions at the time your home is sold.

Holding onto your home and renting it out is also not possible once it has a reverse mortgage registered against it. And after the final owner passes away, the estate could have to pay the reverse mortgage off before the estate is settled.

If you or an older friend or relative is struggling and considering a reverse mortgage, it’s important to consider all your options before making a commitment. Look into whether a conventional mortgage or home equity line of credit is feasible. If the goal is to generate income with the home, meet with a tax professional to understand what that means for your overall financial picture.

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If maintaining the home has become unaffordable or unmanageable, selling it and downsizing might be an option. I often point out to seniors who believe they can’t afford to live elsewhere that renting can be a cost-effective option because their mortgage is paid off. The money they get from selling their home can be invested and/or used to fund living expenses elsewhere. There are tax implications with investment income, so seek sound advice before choosing this option.

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Due to the potential drawbacks of a reverse mortgage, it’s worth discussing all options with your loved ones and appropriate professionals while you’re in good health and of sound mind. A non-profit credit counsellor can help point you in the right direction if you’re not sure where to start.

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Be cautious before entering into an agreement to chip away at your home equity. Your loved ones may even be able to help you safeguard your equity while they share the costs, taking over ownership at a time that’s beneficial for them. Your home might then truly be lending a hand.

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 26 years.

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Jamie Golombek: There are tax consequences to take into account when making a separation agreement

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Among the challenges of separation and divorce is determining whether spousal and child support will be payable, and, if so, how much and for how long. For anyone going through this process, it’s important to take the tax consequences into account when structuring a separation agreement.

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The Income Tax Act distinguishes between spousal support and child support, with different tax rules for each. Spousal support includes any amounts paid on a periodic basis, under a court order or agreement, for the support of a former spouse or common-law partner. Child support, on the other hand, includes any support payments that are not specifically identified in that order or agreement as being only for the former spouse’s or partner’s use. In both cases, the former spouses or partners must be living apart after the breakdown of their marriage or relationship.

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If the court order or separation agreement only provides support for a spouse or partner, then the payments are fully taxable to the recipient and tax deductible to the payor. To ensure tax deductibility, the order or agreement must be registered with the Canada Revenue Agency. To do so, the former spouses or partners should complete CRA Form T1158 Registration of Family Support Payments and include a copy of the order or agreement.

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If, on the other hand, the order or agreement is solely for the support of children, the payments are neither taxable to the recipient nor tax deductible to the payor, so there is no need to register the agreement with the CRA.

If the agreement contains both spousal and child support, and it clearly indicates a separate amount for a spouse or partner, then this portion of the payments will be deductible and taxable. But how formal does the agreement need to be for the support payments to be tax deductible? A recent tax case dealt with this specific issue.

The case involved a taxpayer who got married in 2006, and legally separated on Dec. 8, 2010. In March 2011, the couple entered a separation agreement, signed by both parties. The couple chose to prepare the separation agreement on their own without using lawyers. In the section dealing with spousal support, the agreement stated: “Party 1 shall pay spousal support to party 2 in the amount of $3,500 monthly commencing Dec 8/10 and ending Dec 8/14.”

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The dispute with the CRA, however, involved the 2018 taxation year because the taxpayer continued to make spousal support payments beyond the 2014 end date in their agreement. On his 2018 tax return, he deducted spousal support payments of $42,000 (12 times $3,500), while his ex-spouse included the $42,000 on her return as income.

Canada Revenue Agency tax forms.
Canada Revenue Agency tax forms. Photo by Peter J. Thompson/National Post

The CRA reassessed the taxpayer and denied his deduction for spousal support on the basis that the payments did not fall within the definition of “support amount,” because, in the CRA’s view, the spousal support payments were not made by the taxpayer pursuant to a written agreement.

The judge reviewed the 2011 separation agreement and called it “flawed from the outset.” He noted the signatures of the spouses were not witnessed, and there was a handwritten clause at the bottom of the contract stating the agreement was “subject to approval by legal counsel.” There was no indication such approval was ever obtained.

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Nonetheless, the reality is that the two separated spouses honoured the terms of the written agreement, with the taxpayer paying $3,500 per month in spousal support throughout the term of the agreement and for several years thereafter.

The taxpayer took the position that the March 2011 separation agreement, despite not being properly updated after 2014, constituted an agreement in writing under which he made support payments in 2018.

The CRA argued the support payments in question were not made pursuant to a written agreement. The previously existing separation agreement had expired in 2014, and, therefore, no agreement obliging the taxpayer to pay spousal support existed in 2018.

The judge noted in his analysis that there has been a lot of litigation concerning the issue of whether support payments were made pursuant to a written agreement. As to why a written agreement is necessary, he quoted a prior decision of the Federal Court of Appeal that concluded: “The rationale for not including separated spouses involved in payments made and received pursuant to a verbal understanding is readily apparent. Such a loose and indefinite structure might well open the door to colourable and fraudulent arrangements and schemes for tax avoidance.”

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The judge then turned to the facts of this case, which he noted “is clearly not a fraudulent scheme.” The parties agreed in 2011 in writing to an amount to be paid as spousal support. They “incorrectly overlooked” the need to update the contract in 2014 in order to properly reflect the taxpayer’s continued support obligations.

But since the two parties continued to consider themselves bound by their 2011 separation agreement through the 2018 taxation year, such conduct supports the conclusion that a “meeting of the minds continued to exist concerning spousal support obligations.” In other words, the support established in the 2011 separation agreement was treated by the parties as continuing to be in force up to, and including, 2018.

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The judge, “guided by the plain meaning of the words of the act,” concluded the payments were, indeed, made pursuant to the terms of a written agreement. The payments satisfied the requirements under the Income Tax Act that the support was “an amount payable … on a periodic basis for maintenance … under a written agreement,” and thus should be tax deductible to the taxpayer on his 2018 return.

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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More felt their financial position deteriorated amid another interest rate hike and holiday bills

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Household sentiment soured in December, as holiday bills piled up and the Bank of Canada raised interest rates for the seventh time in 2022, according to a recurring poll that tracks consumers’ financial outlook.

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The latest version of Maru Public Opinion’s monthly household outlook index (MHOI) — shared exclusively with the Financial Post — found that 29 per cent of Canadians felt their financial position deteriorated last month, representing an increase of five percentage points from November. Meanwhile, 11 per cent of respondents said their financial position improved, compared with 14 per cent the previous month.

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“Coming off of a fairly pessimistic November, Canadians were a little bit more upbeat in early December due to a combination of those who are younger making financial adjustments for better savings, retail bargains for lighter budgets, and the festive season,” said John Wright, executive vice-president of Maru Public Opinion. “However, in the aftermath, they’ve returned to their November more negative sentiments, soured by the impact of higher interest rates, inflation, and gift buying bills that are coming home to roost.”

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The survey was conducted Dec. 29 and 30, a few weeks after the Bank of Canada raised its benchmark lending rate a half point to 4.25 per cent. Maru’s index came in at 88 in December, down one point from November and well off the most optimistic result of 107, recorded in July 2021.

The baseline for the index is 100. A score below 100 indicates negative sentiment, while a score above 100 is considered positive. Maru, a subsidiary of global research firm Maru Group, comes up with its household index by asking a representative panel of about 1,500 people a series of questions designed to probe how they feel about the economy’s prospects over the next 60 days. Maru started tracking Canadian households’ outlook in February 2021.

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Asked if the economy was headed in the right or wrong direction, 63 per cent said the latter, unchanged from November. However, the number of Canadians who said they believe that the economy will improve in the next 60 days fell two percentage points to 37 per cent.

Sixty-three per cent of respondents said they could muster two or more months’ of savings to cover an unexpected cost, down from 69 per cent from November. The number of respondents who said they were likely to make a large purchase such as a car or furniture declined six percentage points to 13 per cent in December, meaning 87 per cent were unlikely to make such a purchase in the next 60 days.

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Financial markets appeared to be off limits.

Sixty-eight per cent said they were unlikely to invest in financial markets “because now is not a good time to do so,” up from 61 per cent. The last time Canadians held a similarly negative view was in September 2022.

“When we do the next survey it will be a real telltale sign of where we are headed in the spring,” Wright said, as Canadians continue to juggle inflation and interest rates that have risen on a “hockey stick” curve.

The benchmark interest rate began 2022 at 0.25 per cent, making last year the most aggressive tightening of monetary policy in the Bank of Canada’s history. Policymakers said they spike in borrowing costs was necessary to control inflation, which surged to 8.1 per cent in June and was hovering around seven per cent in November.

• Email: gmvsuhanic@postmedia.com | Twitter:

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Jason Heath: A changed financial landscape means these four strategies might require a rethink

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Tax-free savings accounts have been a go-to savings vehicle for millions of Canadians in recent years. But some significant changes in the personal finance landscape mean that investors and savers may want to reconsider how they use their TFSAs in 2023. Here, I’ll explore the four main strategies that may require a rethink.

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High-interest savings

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Interest rates have increased dramatically over the past year and those rate increases have influenced two of the four strategies. Savings account rates at banks were effectively zero in 2021 and early 2022 before the Bank of Canada started raising interest rates this past March. Whether that interest was taxable or tax free did not make much of a difference.

Now, a handful of institutions have introduced promotional offers at five per cent or higher and regular high interest savings account rates are in the three-to-3.5-per-cent range at many online banks. Interest rates are higher now than they have been at any time since the TFSA was introduced in 2009.

The tax payable on savings account interest can be more than 50 per cent depending on a saver’s income and province or territory of residence. Using a TFSA account to earn that interest may be worth considering.

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Stocks on sale

That said, if someone has a choice to own stocks or have a savings account in their TFSA, there is a Boxing Day sale on now for long-term investors. 2022 has been the worst year for stocks since 2008, the year the TFSA was first proposed in the federal budget.

In 2022, the S&P 500 returned about minus 12 per cent for Canadian investors, the TSX returned around negative six per cent, and developed markets excluding North America generated losses of about 10 per cent. Stocks may or may not rise in 2023, but North American stock markets are trading at June 2021 prices right now. Investors with a long-term time horizon or who can dollar-cost average into stocks during 2023 are likely to reap the benefits five years from now.

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Debt paydown more attractive

Mortgage interest rates were so low for so long that debt repayment lost its lustre. Now that big bank rates are in the six per cent range, borrowers with TFSA accounts should reconsider their saving and debt strategies.

A TFSA investor would need to earn a higher return on their TFSA than the interest rate on their debt to be better off not paying it down. An aggressive investor with low investment fees may come out ahead over the long run, but a conservative investor or an investor with unsecured debt may be hard-pressed to come out ahead financially. Unsecured lines of credit may be carrying interest rates well over 10 per cent and credit card rates could be 18 to 30 per cent.

Credit card interest rates for some could range between 18 and 30 per cent.
Credit card interest rates for some could range between 18 and 30 per cent. Photo by Daniel Acker/Bloomberg

If an investor has debt and can pay down that debt or contribute to their TFSA, this may be a year to reconsider whether taking a guaranteed return equal to their interest rate is better than investing in their TFSA. If an investor has a TFSA balance they are considering using to pay down debt and is hesitant to do it all at once, they could dollar-cost average out of their TFSA over time rather than in one fell swoop.

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Homeowners with a low fixed interest rate mortgage that is coming up for renewal over the next few years may be able to earn a higher return on a savings account or GIC than their mortgage rate, so may be better off waiting to pay down their mortgage at renewal.

Competition from the FHSA

The tax-free first home savings account (FHSA) is being introduced in 2023 and accounts are expected to be available in April. The FHSA is similar to the TFSA given investments grow tax free and withdrawals can also be taken without tax payable, assuming the purchase of a qualifying home by a first-time homebuyer using an FHSA. The one advantage of an FHSA over a TFSA is that contributions are tax deductible. TFSA contributions are made with after-tax dollars with no up-front tax savings. So, up to $40,000 of contributions to an FHSA account can be claimed as deductions to reduce taxable income and generate tax refunds on a contributor’s tax return.

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TFSA investors who anticipate buying a home in the next 15 years — the time limit for an FHSA account to stay open — may want to consider using TFSA savings to contribute to an FHSA.

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An interesting modification to Bill C-32 before it received royal assent on Dec. 15 was to allow an FHSA account to be used in addition to a home buyer’s plan (HBP) withdrawal from a registered retirement savings plan (RRSP). This was not the original intent when the FHSA was proposed in the last federal budget.

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The change means a first-time homebuyer can withdraw up to $35,000 from an RRSP under the HBP and can also contribute up to $40,000 to an FHSA, with an unlimited FHSA withdrawal. So, aspiring homebuyers whose RRSP balances are approaching $35,000 may want to consider shifting their attention to the FHSA, perhaps at the expense of TFSA contributions.

Financial planning for the masses as well as individuals needs to be reconsidered over time. A financial plan should not be stagnant.  The answer to whether you should change your TFSA planning depends on your personal circumstances but is due for revisiting.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at jheath@objectivecfp.com.

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Jamie Golombek: What was ‘simply an honest mistake’ caused an overcontribution to the tune of $112,000

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I’ve already made my 2023 tax-free savings account (TFSA) contribution … have you?

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The new TFSA dollar limit is $6,500 for 2023. And if you’ve never opened a TFSA before, the new cumulative limit could be as high as $88,000 if you’ve been a resident of Canada and at least 18 years of age since 2009.

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Making my contribution was as easy as electronically moving funds from my bank account to my TFSA, which provides a lifetime potential of tax-free investment income and unlimited tax-free gains on the funds’ growth. My intention is to use those funds in retirement, but TFSA funds can be withdrawn, tax free, at any time, for any purpose, such as buying a new car, a wedding reception or a down payment on a home.

No matter what you choose to do with your TFSA funds, keep in mind that one of the biggest benefits of the TFSA, beyond the tax-free income and growth, is the flexibility to recontribute any withdrawn funds back to your TFSA, beginning the following calendar year. You’re also able to transfer funds from one TFSA to another, but it must be done via a direct transfer, rather than a withdrawal and recontribution.

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Taxpayers who don’t appreciate the nuances of the TFSA recontribution or transfer rules, however, could find themselves in trouble with the taxman for overcontributing. That’s exactly what happened in a case decided in late 2022.

The taxpayer’s troubles began in early 2020, when, needing to move closer to his young daughter after separating from his wife, the taxpayer withdrew $50,000 from his TFSA with the intention of making an offer on a new home. He said he did this before actually finding a home because “in a hot housing market in which there were often bidding wars for the same home, a competitive bid necessitated that funds be in hand for an offer to be accepted within a very short period of time.”

The taxpayer quickly realized the housing market was simply “too hot for his financial wherewithal,” so he did what he assumed was “the reasonable thing to do” and deposited the same funds back into his TFSA on Feb. 6, 2020. Unfortunately, the taxpayer’s TFSA contribution room for the 2020 taxation year was only $10,000, such that the redeposit of $50,000 triggered an overcontribution for the month of February of about $40,000.

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The new TFSA dollar limit is $6,500 for 2023.
The new TFSA dollar limit is $6,500 for 2023. Photo by Getty Images/iStockphoto

But things became even more complicated later that month when the taxpayer, in an attempt to consolidate two TFSAs into one account, transferred that same $50,000 from the TFSA into his regular savings account and then into a second TFSA on the same day.

From the taxpayer’s perspective, he was simply transferring funds from one TFSA to another. But from the Canada Revenue Agency’s perspective, the transfer via the savings account on Feb. 20, 2020, triggered a second TFSA contribution of $50,000 for the month of February 2020.

In the end, what was “simply an honest mistake” caused a massive 2020 overcontribution in the eyes of the CRA to the tune of $112,000. (The taxpayer made $22,000 of additional TFSA contributions during the rest of 2020).

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Under the Income Tax Act, there’s a penalty of one per cent per month for each month there is a TFSA overcontribution. As a result, the taxpayer in July 2021 received a notice of assessment from the CRA, charging him a penalty tax of $6,270, along with $332 in penalties and interest.

The act, however, allows the CRA discretion to grant relief, and states that a CRA officer may waive or cancel the penalty tax if the excess arose through “reasonable error” and is corrected by the individual “without delay.”

The taxpayer wrote to the CRA to request it cancel the assessment, arguing that “he was not aware that redepositing the same funds that were withdrawn during the same taxation year would constitute additional contributions.”

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The taxpayer’s request was denied by the CRA in September 2021 on the basis that even though his TFSA overcontribution was unintentional, it did not consider the taxpayer’s misinterpretation of the contribution rules to be a “reasonable error,” since the taxpayer had, back in 2013, already been granted relief on a TFSA overcontribution.

In October 2021, the taxpayer submitted a second request for the CRA to cancel the assessment, which was again denied. The taxpayer then took the matter to Federal Court, where the judge’s role is to determine whether the CRA officer’s refusal to exercise their discretion to deny the taxpayer relief was “reasonable.”

As in prior cases, a reasonable decision is one that is “based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker.” Generally, a CRA decision is not set aside unless it contains “sufficiently serious shortcomings … such that it cannot be said to exhibit the requisite degree of justification, intelligibility and transparency.”

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Arguing one’s general ignorance of the law is not, by itself, sufficient to demonstrate an error was reasonable. Rather, “reasonable error” is limited to situations where the overcontributions occurred for reasons outside the taxpayer’s control, which can include bank errors, physical disasters, civil disruptions, a serious illness or accident, or distress.

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The judge was sympathetic towards the taxpayer, but nonetheless concluded he was a “repeat overcontributor” and did not make a reasonable error in overcontributing in 2020, thus the CRA officer’s decision to deny him relief was rational.

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“The threshold for the determination of a reasonable error is high as our tax rules are based on a self-reporting system that relies on taxpayers to understand or be informed of the law and to take reasonable steps to comply with (it),” the judge said. “For TFSA purposes, taxpayers are responsible for being aware of their contribution limits and for ensuring that their contributions comply with applicable rules.”

In the end, the judge simply felt the excess TFSA contributions were made by the taxpayer because of his misunderstanding of the rules, and not, therefore, the consequence of a reasonable error, which may have warranted relief.

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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Higher interest rates are causing headaches for some homeowners, but one place the rapid increase in rates is helping is in the solvency of defined-benefit pension plans.

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Despite the significant volatility and market declines in 2022, the Mercer Pension Health Pulse, which tracks the median solvency ratio of the defined benefit (DB) pension plans, finished the year at 113 per cent, up from 108 per cent at the end of September and 103 per cent at the beginning of 2022.

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The improved position was primarily due to the significant increases in interest rates during 2022 because higher rates lead to lower pension liabilities.

Of the plans in Mercer’s database, 79 per cent are estimated to be in a surplus position on a solvency basis compared to 61 per cent at the end of 2021.

Despite this relative improvement, the pension consultant said some plan structures are vulnerable to macroeconomic developments.

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For example, the financial positions of plans that use leverage on the fixed-income component of their asset mix and also invest in equities would have likely decreased, said Ben Ukonga, a principal at Mercer and leader of the firm’s wealth business in Calgary.

Moreover, if there is “continued high inflation, capital market headwinds, and geopolitical tensions, 2023 could turn out just as volatile as 2022,” he said.

For sponsors of final average earnings and/or indexed pension plans, the impact of the already realized high inflation could be significant, Ukonga noted.

“Coupled with the potential for the high level of inflation to continue, even if only for the short to medium term, these plans could have large inflation-related liability risks that may not be immediately apparent to the plan sponsor and other stakeholders,” he said.

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In an effort to tame inflation, the Bank of Canada increased its key policy rate seven times in 2022, from 0.25 per cent at the beginning of the year to 4.25 per cent.

Mercer said sponsors of non-indexed defined benefit plans, particularly those in a surplus position, could face calls for “ad hoc” cost of living adjustments from pensioner groups.

The picture in 2022 was somewhat dimmer for defined contribution (DC) plans, group RRSPs and group TFSAs which, unlike defined-benefit plans, do not guarantee annual payouts. Mercer said the majority of these plan members would have experienced “negative investment returns” in their accounts last year.

The S&P/TSX Composite Index was down 8.66 per cent in 2022, the largest one-year decline since the end of 2018.

“For members close to retirement, this may alter their retirement decisions,” Mercer said, adding that the high inflationary environment could also influence when pensioners choose to leave the workforce.

• Email: bshecter@nationalpost.com | Twitter:

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Here’s what you need to consider while preparing your DIY retirement plan

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By Julie Cazzin with Allan Norman

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Q: I have been the sole income earner while my spouse stayed home to raise our kids. After working for 35 years, I want to retire soon. I’m 56 years old and my wife Mary is 53. My plan is to work through to the end of 2023. I have run my numbers through retirement calculators and while I see the first three years as possibly lean, I am somewhat comfortable with the whole picture. My wife, however, wants me to work longer. She cannot see how we can go from living off $145,000 gross per year down to $70,000 gross.

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We own a mortgage-free home worth $400,000, two vehicles and have a $28,000 loan. I have $83,000 in registered retirement savings plans (RRSPs) and $415,000 combined in a locked-in retirement account (LIRA) and a defined-contribution plan (DCP). My wife has two spousal RRSP accounts totalling $163,000 to which I contribute $25,000 per year. I still have $200,000 of past RRSP contribution room. We also have $37,000 in a bank account and I have a tax-free savings account (TFSA) of $9,000. And we may have a $350,000 inheritance from my healthy, 79-year-old father, but I don’t want to include it in the plan. Am I OK to retire? — Scott

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FP Answers: Scott, retiring at age 57 may be tight, and if your wife is not on board then you might be going from one stress to another. Here’s what you need to consider while preparing your DIY retirement plan.

Retirement income check: You are now earning $144,000 per year, so after tax, employment expenses, loan payments and retirement savings, you’re left with about $77,000, which is the amount you’re currently spending each year.

Reducing your retirement income to $70,000 gross per year leaves you with about $55,000 a year for spending after tax and loan payments. What lifestyle reductions are you planning to make so you can live on an annual $55,000 net?

Gross income needs: Base your retirement income needs on after-tax income. A combined gross income of $70,000 a year from a registered retirement income fund (RRIF) results in about $59,000, whereas a $70,000 draw from your inheritance will be mostly tax free. Once you know your after-tax income needs, work out the best withdrawal strategy based on tax consequences.

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Pension splitting: Pension splitting with RRIFs and lifetime income funds (LIFs) starts once you reach your 65th year, not before. You’ve done well here. Mary has accumulated enough in her RRSPs to be able to draw about $35,000 a year, giving you equal taxable incomes up to your age 65. At that time, her RRSPs will be depleted, but you’ll be 65, so you can split your RRIF income with her.

Spousal RRSP: You must wait two full calendar years with no contributions before you can draw money from a spousal RRSP and have it taxed in Mary’s name. The two-year calendar rule doesn’t apply to minimum spousal RRIF withdrawals. Play it safe and make 2022 your last contribution year to ensure a draw in 2025 will be taxed in Mary’s name.

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LIRA and DCP: In Ontario, you can unlock 50 per cent of these accounts when converted to a LIF, and transfer the unlocked portion to an RRSP or RRIF. LIF accounts are often the first place to draw a retirement income from.

Old Age Security (OAS) and Canada Pension Plan (CPP): This is your only guaranteed income and it is indexed. You will be close to the maximum CPP, and Mary may have very little. CPP and OAS decrease by 0.6 per cent for every month you take it before age 65. After age 65, CPP increases by 0.7 per cent per month and OAS 0.6 per cent for every month you delay taking it. I think it’s too soon for you to decide when to start CPP and OAS.

Consider your possible early demise: Would Mary have enough money if you died early? She’d likely get 60 per cent of your CPP, but your OAS would stop. What about the inheritance from your dad, would she still receive it?

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Let’s assume investment returns of six per cent and inflation of three per cent and exclude your home equity and possible inheritance. Spending at your current rate, $77,000 net per year, means you’ll run out of money when you’re 67 and Mary is 64. If you can reduce your annual spend to about $56,000, you will have just enough to get you to age 90 if everything goes right. A lot can happen over 30-plus years.

Now, let’s look at things such as using home equity and the inheritance. Adding a $350,000 inheritance in 10 years means you could increase your after-tax income to $66,000 per year, which is getting closer to your current annual spending of $77,000 plus $4,000 for a car loan.

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Of course, we can further improve this by using the equity in your home to get a reverse mortgage or by moving to an apartment, but how secure is Mary going to feel? If we include the inheritance and you work an extra two years, that potentially brings your after-tax income up to $74,000 per year.

Scott, I think you are forcing this a little and making it work by cutting your retirement income and not leaving yourself any wiggle room. To be fair to you, I’ve only looked at this from a financial perspective. From a health perspective, a change in lifestyle and early retirement may be the best thing for you. You never know what new opportunities will appear once you have de-stressed.

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: Many important tax figures have been substantially increased for 2023

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Given the high inflation we experienced in 2022, many of the important tax figures have been substantially increased for 2023. Here are the new numbers, along with a few other changes that launch on Jan. 1.

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Inflation adjustment factor: Most (but not all) income tax and benefit amounts are indexed to inflation. In November 2022, the Canada Revenue Agency announced the inflation rate to be used to index the 2023 tax brackets and amounts would be 6.3 per cent.

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Increases to the tax-bracket thresholds and various amounts relating to non-refundable credits take effect on Jan. 1, 2023. But increases for certain benefits, such as the GST/HST credit and Canada Child Benefit, only take effect on July 1, 2023. This coincides with the beginning of the program year for these benefit payments, which are income tested and based on your prior year’s net income, to be reported on your 2022 tax return due this spring.

Tax brackets for 2023: All five federal income tax brackets for 2023 have been indexed to inflation using the 6.3-per-cent rate. The new federal brackets are: zero to $53,359 (15 per cent); more than $53,359 to $106,717 (20.5 per cent); more than $106,717 to $165,430 (26 per cent); more than $165,430 to $235,675 (29 per cent); and anything above that is taxed at 33 per cent.

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Each province also has its own set of provincial tax brackets, most of which have also been indexed to inflation, but using their respective provincial indexation factors.

Basic personal amount (BPA): The BPA is the amount of income an individual can earn without paying any federal tax. The government in December 2019 announced an increase in the BPA annually until it reaches $15,000 in 2023, after which it will be indexed to inflation. As a result, the increased BPA for 2023 has been set by legislation at $15,000, meaning an individual can earn up to this amount in 2023, before paying any federal income tax.

For taxpayers earning above this amount, the value of the federal credit is calculated by applying the lowest federal personal income tax rate (15 per cent) to the BPA, making it worth $2,250. Because the credit is “non-refundable,” it’s only worth the maximum amount if you would have otherwise paid that much tax in the year.

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But higher income earners may not get the full, increased BPA since there is an income test. The enhanced BPA is gradually reduced, on a straight-line basis, for taxpayers with net incomes of more than $165,430 (the bottom of the fourth tax bracket for 2023) until it gets fully phased out when a taxpayer’s income tops $235,675 (the threshold for the top tax bracket in 2023).

Taxpayers in that top bracket who lose the enhanced amount will still get the “old” BPA, indexed to inflation, which is $13,521 for 2023.

CPP (QPP) contributions: The Canada Pension Plan contribution rate for 2023 is 5.95 per cent (6.4 per cent for the Quebec Pension Plan) with maximum contributions by employees and employers set at $3,754.45 ($4,038.40 for QPP) in 2023, based on the new yearly maximum pensionable earnings of $66,600 (with a $3,500 basic exemption.)

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For self-employed Canadians who must contribute twice the amount, the maximum CPP contribution for 2023 will be $7,508.90 ($8,076.80 for QPP), up from the 2022 amount of $6,999.60 ($7,552.20 for QPP).

The CPP hike is part of a multi-year plan approved six years ago by the provinces and the federal government to increase contributions and benefits over time.

EI premiums: Employment insurance premiums are also rising, with a contribution rate for employees of 1.63 per cent (1.27 per cent for Quebec) up to a maximum contribution of $1,002.45 ($781.05 for Quebec) on 2023 maximum insurable earnings of $61,500.

Tax-free savings account (TFSA) limit: The 2023 TFSA contribution limit will increase for the first time since 2019 to $6,500 (from $6,000). The cumulative TFSA limit is now $88,000 for someone who has never contributed to a TFSA, and has been a resident of Canada and at least 18 years of age since 2009.

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RRSP dollar limit: The registered retirement savings plan dollar limit for 2023 is $30,780, up from $29,210 in 2022. Of course, the amount you can contribute to your RRSP is limited to 18 per cent of your 2022 earned income, which includes (self)employment and rental income, less any pension adjustments, up to the current annual dollar limit.

Old Age Security (OAS): If you receive OAS, the repayment threshold for 2023 is set at $86,912, meaning your OAS will be reduced in 2023 if your taxable income is above this amount.

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First Home Savings Accounts (FHSA): Legislation to create the new tax-free FHSA was recently passed, paving the way for it to be launched as early as April 1, 2023. 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 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, will, like a TFSA, be non-taxable. The new legislation confirms that a first-time homebuyer can use both the FHSA and the existing Home Buyers’ Plan to purchase their first home.

Multigenerational Home Renovation Tax Credit: Jan. 1 also marks the beginning of this new credit, which is equal to 15 per cent of eligible expenses (up to $50,000) incurred for a qualifying renovation that creates a secondary dwelling to permit an eligible person (such as a senior or a person with a disability) to live with a relative.

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Anti-flipping rules: Finally, new anti-flipping rules for residential real estate are scheduled to come into force on Jan. 1, and are designed to “reduce speculative demand in the marketplace and help to cool excessive price growth.”

The principal residence exemption will not be available on the sale of your home if you’ve owned it for less than 12 months (with certain exceptions). Instead, the gain will be 100-per-cent taxable as business income.

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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