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Taxes

Golombek was gearing up for a day in court over a dispute over work-from-home expenses, but it never came

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I never did get my day in court, but I came awfully close.

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I’ve been battling the taxman for more than a year in an attempt to get the Canada Revenue Agency to allow my work-from-home expenses for the 2020 tax year. That fight came to an end last week, when I received a reassessment allowing nearly all my home-office expenses, refunding my overpaid tax, reversing the arrears interest previously charged, and even paying me some refund interest (albeit, taxable).

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I’m sharing my full story so you know what’s in store if you, too, decide to take on the CRA.

The origin of my tax dispute can be traced back to March 12, 2020. I had Toronto Maple Leafs tickets for that night’s game against the Nashville Predators, and my son was to meet me downtown after work for the game. But things would dramatically change: that afternoon, the NHL suspended all games due to COVID-19 and our offices shut down that evening for what would turn out to be many months.

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As of March 13, I began working from home full time, using a spare bedroom as my new office. I deducted some home-office expenses for the first time in my career when I filed my 2020 tax return.

Employees who are working from home due to the pandemic have two methods to claim work-from-home expenses: the temporary flat rate method ($2 per day, up to $500 in 2022) and the detailed method, where employees tally up the actual expenses incurred and allocate them on a “reasonable basis” to determine the portion related to employment use. This is typically done by dividing the workspace area by the home’s total finished square metres (including hallways, bathrooms, kitchens, etc.).

Expenses include utilities, home internet, rent, maintenance and minor repair costs, and office supplies. You can’t deduct mortgage payments, capital expenses or depreciation (capital cost allowance), and only commissioned-based employees can deduct their property taxes and home insurance.

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In my case, the detailed method proved to be the better option, but it meant having to substantiate each and every expense in case the CRA wanted to “review” my return, which is exactly what happened.

In August 2021, I received a “review letter” from the CRA asking for more information about various items on my return, including my claim for the digital news subscription tax credit, proof that I made a small political contribution and, most significantly, support for my work-from-home employment expense claim.

The CRA wanted a copy of my signed T2200, Declaration of Conditions of Employment, and a “detailed breakdown of the amount claimed and the supporting documents.” It also asked for a copy of my T777, Statement of Employment Expenses, and a breakdown of how I calculated the percentage of the expenses I could deduct, and “a copy of the floor plan of the residence with the home office.”

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I didn’t have a copy of my home floor plan, but I was pretty conservative with my estimate, claiming less than 10 per cent of my total home expenses for the use of my home office. I prepared a detailed schedule of my monthly hydro, gas and internet expenses, complete with dates and amounts using downloaded information from my online banking.

Unfortunately, this wasn’t enough to justify my claim. My $75 digital news credit and political donation were allowed, but my home-office expenses were denied in their entirety as I apparently did not send sufficiently detailed information to substantiate my claim. This was confirmed in a January 2022 formal reassessment.

I paid the reassessed tax for 2020 to stop the daily compounding of non-deductible, arrears interest from being charged and, in February 2022, filed a formal Notice of Objection. I sent the CRA PDF copies of all my monthly 2020 statements from each utility provider, totalling 89 pages of documentation, to justify my claim. And then I waited. And waited.

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Periodically, I would go online to the CRA’s My Account page and check under the Progress Tracker to see if any action had been taken. Finally, after several months, the status was updated online: a preliminary review of my objection was conducted, and it was determined to be of “medium complexity.”

Medium complexity income tax objections resolved in August 2022 were completed in an average of 283 days from the date the objection was submitted. That was too long for me to wait, so I exercised my right to appeal directly to the Tax Court, which can be done 90 days after filing a notice of objection if the CRA hasn’t responded by then.

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In late May 2022, I filed my appeal and was told my case would be heard in Toronto “at the first available opportunity.” I was excited and confident. But other than a couple of parking tickets in the 1990s, I’d never been to court before so I had to prepare. I rewatched 12 Angry Men and My Cousin Vinny. I was now ready for court.

But my day in court was not to be. Shortly after filing my appeal, I got a call from a friendly CRA litigation officer who said he had reviewed my file and was prepared to allow all my work-from-home expenses, save for $99. I quickly agreed.

A week later, he had me sign a consent to judgment, which was later certified by a Tax Court judge. On Sept. 14, I received my new Notice of Reassessment, along with a direct deposit of my tax refund and interest.

I really was looking forward to my day in court. Perhaps another time.

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: Here’s a brief look at the measures Ottawa is implementing to help with rising costs

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The federal government this week announced details of three measures to “make life more affordable for Canadians who need it most” in light of the rising cost of living, primarily due to higher food prices and rent.

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Specifically, it’s doubling the Goods and Services Tax Credit (GSTC) for six months, introducing the new Canada Dental Benefit for children under 12 who do not have access to dental insurance, and giving a one-time top-up to the Canada Housing Benefit for low-income renters. Let’s take a brief look at each of these measures.

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Doubling the GSTC

The GSTC is meant to offset the cost of paying GST on purchases of goods and services for low- and modest-income Canadians. The credit is paid quarterly in January, April, July and October, and is indexed to inflation each benefit year, which runs from July through June.

The amount of GSTC you receive depends on your income and family size. For the current benefit year, which began July 2022 and runs through June 2023, single Canadians without kids receive a total of $467. Married or common-law couples receive $612 while single parents receive $612. Recipients with kids get $161 for each child under age 19.

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That said, only those with lower incomes get the full GSTC. To receive the full amount, your family income must be less than $39,826 in 2021. Above this income level, the GSTC is gradually reduced as income rises and the full phase-out depends on family type. For example, a single person without children would not get any GSTC once their income reaches $49,200, while a couple with two kids could have 2021 income up to $58,500 before being fully phased out.

The GSTC is indexed to inflation, but it’s done on a lagging basis. For the current benefit year, the value of the GSTC grew by 2.4 per cent based on the average consumer price index during October 2020 to September 2021. As a result, the sharp rise in inflation in 2022 is not yet reflected in the GSTC payments currently being distributed.

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To help support Canadians in the interim, the government announced it’s doubling the GSTC for six months. The extra GSTC amounts will be paid to all current recipients through the existing system as a one-time, lump-sum payment before year-end, meaning recipients do not need to apply for the additional payment, but must have filed a 2021 tax return to be eligible.

The GSTC will also help postsecondary students who typically have little or no income. For example, let’s say Sarah, who’s currently in university, earned $5,000 in 2021 through part-time and summer employment. She’s currently receiving $233.50 in GSTC for the July through December 2022 period, and will receive another $233.50 for the January through June 2023 period. With the temporary doubling of the GSTC amounts for six months, Sarah will receive an additional $233.50. In total, she will receive $700.50 in GSTC payments.

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It’s estimated 11 million individuals and families will benefit from this additional support, costing approximately $2.5 billion.

The Canada Dental Benefit

The government also announced it is proceeding with its commitment to launch a national dental program for uninsured Canadians with an annual family income of less than $90,000. The program will start by covering children under 12 years of age in 2022.

The Canada Dental Benefit (CDB) will provide eligible parents (or guardians) with direct, upfront tax-free payments to cover dental expenses for kids under 12. The target implementation date is set for Dec. 1, 2022, but the program will cover expenses retroactive to Oct. 1, 2022.

The CDB will provide payments of up to $650 per child, per year for families with adjusted net income of less than $90,000 per year and without dental coverage. Families with income under $70,000 would get the full $650 per child. If family income is between $70,000 and $80,000, the benefit is reduced to $390 per child, and for family income between $80,000 and $90,000, the benefit will be $260 per child.

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To access the CDB, parents of eligible children will need to apply through the Canada Revenue Agency and attest their child does not have access to private dental care coverage and they have out-of-pocket dental care expenses for which they will use the CDB. They may also need to show receipts to verify the kids’ dental expenses.

The government estimates 500,000 Canadian children could benefit from the CDB, at a cost of $938 million. Details on how and when to apply have not yet been released.

Canada Housing Benefit

The Canada Housing Benefit (CHB) is administered through the provinces and helps lower-income Canadians pay their rent. Each province has its own system for accessing the funding, but to qualify, family income must be less than $35,000 annually ($20,000 for single Canadians), and the renter must spend 30 per cent or more of their income on rent.

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  1. None

    Restaurant finds itself in hot water with CRA over servers’ electronic tips

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This week, the government announced a one-time top-up to the CHB that will consist of a tax-free payment of $500 to provide direct support to low-income renters. The payment will be launched by year-end and delivered by the CRA through an attestation-based application process.

To determine eligibility, the CRA will do an upfront verification of the applicant’s income, age and residency for tax purposes. Applicants will need to attest they are spending at least 30 per cent of their income on shelter and that they’re paying rent for their own primary residence in Canada, as well as specify the rental property’s address, the amount of rent paid in 2022 and the landlord’s contact information. They’ll also need to provide consent for the CRA to verify their information to confirm eligibility.

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Students who pay rent and meet the income test above will also qualify. The government estimates 1.8 million low-income renters will qualify for support, at a total cost of $1.2 billion.

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: The restaurant didn’t include electronic tips in its CPP and and EI liabilities

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If you’re an employee who gets a regular paycheque, you’ll be very familiar with the concept of source withholdings, which reduces your take-home pay.

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Put simply, your employer is legally required to withhold and remit federal and provincial income tax to the Canada Revenue Agency, as well as Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums.

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Failure to withhold any of these can land an employer in hot water with the CRA, as one Nova Scotia restaurant recently found out. But before delving into details of the case, let’s review the basic rules governing CPP and EI deductions.

Under the CPP, the employer’s contribution is determined by applying a contribution rate to the “contributory salary and wages of the employee … paid by the employer,” less certain deductions. For 2022, employee CPP/QPP contributions are 5.7 per cent of earnings between $3,500 and $64,900, so the maximum amount of contributions for this year is $3,500. Employers are required to match employee contributions.

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For 2022, an employee’s EI premiums are 1.58 per cent of “insurable earnings” up to $60,300, so the maximum EI premium you may pay is $953. Insurable earnings are defined as “the total of all amounts, received or enjoyed by the insured person (i.e., employee) that are paid to the (employee) by the … employer in respect of that (insurable) employment.”

Under the EI Act, employers must contribute 1.4 times the employee premiums, or 2.21 per cent of insurable earnings, with a 2022 maximum premium of $1,334 per employee.

The recent case involved a popular, seaside restaurant in downtown Halifax that didn’t remit CPP and EI on part of its servers’ tips. Customers sometimes leave a tip in cash, which the servers are free to keep without advising their employer. Most customers, however, choose to pay their restaurant bills using a debit, credit or gift card, and include a tip in their electronic payment. The restaurant, in turn, shares these tips with its servers in a formalized, daily procedure.

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At the end of each shift, each server prints a “summary of sales” from the restaurant’s point-of-sale system. That summary shows each server’s food sales, beverage sales, cash received from patrons who paid in cash, electronic payments received and electronic tips. This info is used to prepare a “cash out sheet.”

On that sheet, the server records their electronic tips, the cash received, a kitchen staff “tip-out” (equal to one per cent of food sales), and an amount equal to two per cent of the electronic tips (the processing charge). The restaurant retains the tip-out to pass along to its kitchen staff and the processing charge to cover its credit-card fees. The net amount is the server’s “net electronic tip.”

If none of the server’s customers happened to pay their restaurant bills in cash that day, the restaurant simply transfers an amount equal to the server’s net electronic tip to the server, typically the next business day, via direct bank deposit. This is known as the “due-back.”

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In some circumstances, a server’s due-back is less than the server’s net electronic tip. This happens when a restaurant customer pays in cash, which the server retains and is taken into account in calculating the due-back. In these cases, the server’s net electronic tip is partially received in cash (from customers’ payment of their restaurant bills), and partly from the due-back received from the restaurant itself.

At the end of each shift, each server also prepares two envelopes in which they place cash to “tip out” the onsite restaurant manager and assistant manager — two per cent — and the support staff (bussers, hosts/hostesses and bartenders) at one per cent per support staff person (to a maximum of three per cent).

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Each server delivers their summary of sales, their cash out sheet, and the two envelopes to the onsite manager at the end of their shift who later distributes the cash tip-outs to the restaurant managers and support staff. The sales summary and cash out sheet were set aside and picked up the next morning by someone from accounting to facilitate payment of the servers’ due-backs.

The restaurant took the general position that due-backs received by servers were not considered to be “pensionable salary and wages” for purposes of CPP rules, nor “insurable earnings” for purposes of the EI Act. As a result, when it calculated its CPP and EI liabilities for 2015, 2016 and 2017, it did not consider any portion of the electronic tips.

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Needless to say, the CRA took a different view and assessed the restaurant on the basis that a portion of the servers’ electronic tips for 2015, 2016 and 2017 should have been considered. The taxpayer took the matter to Tax Court in 2020 and lost. It then appealed the decision to the Federal Court of Appeal (FCA), which heard the case earlier this year.

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The key question the court had to decide was whether the due-backs were properly considered to be amounts paid by an employer to employees “in respect of” their employment. The restaurant argued the due-backs are not paid in respect of a server’s employment and are not insurable earnings because a server’s due-back bears “little or no relation to the server’s net tip. It is simply the difference between cash payments for meals and electronic tips owing.”

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The three-judge appellate panel disagreed, citing a seminal 1983 decision of the Supreme Court of Canada, which stated that the words “in respect of” have “wide scope and import such meanings as ‘in relation to,’ ‘with reference to’ and ‘in connection with.’ In other words, “but for” their employment as servers by the restaurant, the servers would not receive any tips paid to them in the form of due-backs.

The FCA, in a written decision released last month, concurred with the lower court’s decision, and concluded the due-backs were “contributory salary and wages of the employee paid by the employer” for purposes of the CPP and “insurable earnings” for purposes of the EI Act.

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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Jason Heath: There are ways to pay less tax during your working years and in retirement

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Canadians file individual tax returns and pay tax at progressively higher rates as income increases. Some countries, such as the United States, allow couples who are married and who file jointly to save tax if one spouse earns significantly more than the other and their incomes are combined. While Canada’s laws on income splitting are not as generous, there are a few strategies that taxpayers here who are single, married or have children can pursue to split income and lower their tax bills.

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Self-employment strategies

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Taxpayers who work for themselves have unique opportunities to split income that are not available to employees. For one, they can employ family members and pay them a tax-deductible salary. This can be advantageous when they have family members whose incomes and tax rates are lower. A taxpayer can deduct the salary from taxable income just like other business expenses.

A salary paid to a spouse or child is deductible if it meets three conditions. First, the salary is actually paid to them. The work they do must also be necessary for earning the business income. Lastly, it must be reasonable given their age, and in line with what you might pay someone else. The salary should be reported on a T4 slip just as you would for another employee.

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Business owners can split income with a corporation by incorporating their business. When a corporation earns income, you only pay personal tax on the income that is paid out personally as either a salary (as an employee) or as a dividend (as a shareholder). Business income that is left in a corporation and not withdrawn from personal use is only subject to corporate tax.

Small business income tax rates for a corporation range from 10 per cent to 12.2 per cent depending on the province or territory. By comparison, the top personal tax rate in Canada is as high as 54.3 per cent. This means when you split income with a corporation, you can defer up to about 40 per cent tax on that income. This higher after-tax income can be used to reinvest in the business or to invest in stocks, bonds, mutual funds, exchange traded funds, real estate, or other investments in a corporate investment account.

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Until 2018, it was possible for business owners to split income with adult family members by paying them dividends on shares they owned of a corporation. Beginning that year, tax on split income (TOSI) rules came into effect and made it more difficult to pay dividends to family members. Split income paid from a corporation is taxed at the highest tax rate unless certain criteria are met. One of the most common exceptions is when a family member who owns shares of the corporation works at least 20 hours per week on average for the company. In this case, dividends can be paid to them and taxed to them without the punitive TOSI rules applying.

Pension planning

Workers with pensions can split their eligible pension income with their spouse or common-law partner in retirement. However, there is a difference between defined-benefit (DB) and defined-contribution (DC) pension plans.

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Workers with DB pensions that receive a calculated monthly benefit in retirement can split up to 50 per cent of their pension with their spouse or common-law partner on their tax return. The amount can change from year to year and the ability to split income can help a couple to pay the least amount of combined tax.

Workers with DC pensions that invest in mutual funds to provide a future retirement income have restrictions on their ability to income split. If the DC pension is used to buy an annuity or provide another lifetime retirement benefit, the income may be eligible to split with a spouse or common-law partner without restriction. Otherwise, a DC pension must be converted to a life income fund (LIF) or locked-in retirement income fund (LRIF) depending on the federal or provincial pension legislation for the plan. Although withdrawals can generally be taken from a LIF/LRIF at 55, the income cannot be split with a spouse or common-law partner until the accountholder’s age 65.

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Workers who contribute to the Canada Pension Plan (CPP) can apply for a retirement pension as early as age 60. CPP allows a recipient and their spouse or common-law partner to apply to split their pensions by completing a CPP pension sharing form. The CPP earned by the couple based on contributions made during the years they lived together will be divided equally between them. This may result in tax savings if there is an income differential.

RRSPs and RRIFs

Like DC pensions that are converted to LIF/LRIF accounts, registered retirement savings plans (RRSPs) that are converted to registered retirement income funds (RRIFs) do not qualify for pension income splitting until the year the accountholder turns 65. RRSP withdrawals do not qualify for pension income splitting unless the account is converted to a RRIF either.

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RRSP contributions provide a method to split income today and in the future. If spouses have a significant difference in incomes, RRSP contributions should be made by the higher income spouse. RRSP deductions will reduce the higher income spouse’s income and leave the other spouse’s income to be taxed at a lower tax rate. One exception to this rule could be if the lower income spouse has a matching contribution for a group retirement plan with their employer. The benefit of the match may exceed the tax differential between the spouses.

If a couple is concerned about having all the RRSP assets in one spouse’s name, the higher-income spouse can contribute to a spousal RRSP for the other. A spousal RRSP is an RRSP that one spouse contributes to but is owned by the other spouse. The spousal RRSP owner can take withdrawals in the future that are taxable to them, subject to a three-year time limit that may cause withdrawals to be taxable to the contributor.

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Non-registered investments

If someone has maxed out their RRSP and tax-free savings account (TFSA), there may still be income-splitting options to consider. If married, the higher-income spouse’s income can be used to fund living expenses while the lower-income spouse saves some or all of their income. By having the lower-income spouse build non-registered assets, the investment income will be taxable to them at their lower tax rate.

A higher-income spouse cannot just give money to a lower-income spouse to invest to save tax. The income and capital gains would be subject to attribution and taxable back to the gifting spouse.

Money can be loaned to the lower-income spouse to invest as long as the loan is made at the Canada Revenue Agency (CRA) prescribed rate in place at the time of the loan. That rate is currently two per cent, but is set to rise to three per cent in the fourth quarter of 2022.

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Money can be gifted to a minor child to invest and only the income (interest and dividends) is taxable back to the parent. The capital gains, however, are not taxable to the parent and can be realized in the child’s name. If a child has no other income, capital gains between $16,962 and $28,796 can be triggered tax free each year.

Taxpayers with significant non-registered assets into the hundreds of thousands of dollars could consider establishing a discretionary family trust. By loaning money at the CRA prescribed rate to a family trust with children, grandchildren or other family members as beneficiaries, income can be shifted to those with lower incomes, some of whom may have little to no income or tax to pay.

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Summary

There are ways to pay less tax during your working years and in retirement. It may be easier to split income for those with a spouse or children, but even single people with no kids of their own may have options to consider.

You can only spend or save what you keep after tax, so by considering ways to legitimately lower your tax payable, you can become more financially independent or have more money to provide for your family.

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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Adding a child’s name to your assets won’t accomplish your goal of reducing capital gains tax

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By Julie Cazzin with Andrew Dobson

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Q: My wife Ava and I are in the process of gifting some money to our only child, Marlena. I know that in Canada I can do this tax free. But what are the consequences of adding Marlena’s name to the title on our principal residence, small rental property and cottage, as well as all our bank accounts? All three properties were purchased in the 1970s so there’s a hefty capital gains tax to be paid when we sell or die. We’d like to avoid this if possible. Marlena is 60, single and has one child, our grandson Henry. Is this a good way to save on paying capital gains tax? If not, what are some other ways we can avoid a big capital gains tax bill when we die? — Henry

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FP Answers: There are several factors to consider when determining potential strategies to minimize tax. First, the principal residence exemption may allow you and Ava to avoid paying capital gains tax on some of the real-estate appreciation. The principal residence exemption allows a tax-free capital gain on a property you ordinarily inhabit. It does not need to be your primary home. It can be claimed for your cottage. But since most people’s homes are more expensive than their cottage, it is uncommon to claim it on a secondary property.

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A couple can only have one principal residence between them, and one principal residence exemption claim in a given year. Since all three properties were purchased in the 1970s, claiming the exemption on your home will likely cause your cottage to be fully taxable.

The capital gains tax was not introduced in Canada until 1972, so only appreciation from 1972 onwards would be taxable. There used to be a $100,000 lifetime capital gains election, and, in 1994, many cottage and rental property owners bumped up the adjusted cost base of their properties to use some or all of that exemption. If you did, that may reduce some of the capital gain on your other properties.

The principal residence exemption is claimed when a property is sold. If you transfer a property to a family member, that is considered a deemed disposition, as if you sold the property. The same disposition occurs at death when you are deemed to have sold all your assets. Transferring an asset to a family member takes place at fair market value, so you cannot gift it or use an artificially low value to avoid taxes.

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You may be able to get creative and transfer partial ownership each year for a number of years to your daughter to have small capital gains and keep your income in a lower tax bracket. But if you add Marlena to the title on your properties, there could be other issues related to the principal residence exemption.

For example, if you add Marlena to the title on your principal residence today and the value increases from now until you die, there may be tax to pay on the accrual of her share of the value from when she was registered on the title to when the property is sold.

If you live in a province where probate fees are high, joint ownership with your daughter may help avoid some probate costs by virtue of your share of the asset passing on to Marlena by rights of survivorship.

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With real estate, there may not be much logistical advantage to owning them jointly. If Marlena is the executor for your estates, she may still be able to enter the home, gather an inventory of items, and even list the property for sale without owning the property. Though it could take several months for the probate process to be finalized, she may not necessarily have that much more flexibility by inheriting the home through rights of survivorship than being the beneficiary of the will.

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With bank accounts, you may be susceptible to several risks if you add Marlena to these accounts. She would have full access to these funds as a joint account holder. Also, just like other assets such as your real estate, if Marlena is subject to a lawsuit or gets into a relationship and has a family law dispute, these joint assets could be subject to claims. If you have non-registered investment accounts and add your daughter’s name to them, it could result in a deemed disposition and capital gain on a portion of the investments.

Before adding Marlena’s name to any of your assets, please consider that the risks may outweigh the benefits. Talk to your accountant and estate lawyer to get their input. Given your primary motivation seems to be avoiding capital gains tax, adding your daughter’s name to your assets will unfortunately not accomplish that goal.

Andrew Dobson is a fee-only/advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc.

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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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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.

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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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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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  4. First-time homebuyers can use the Tax-Free Savings Account and the Registered Retirement Savings Plan via the Home Buyers’ Plan to fund a down payment.

    These are the tax-sheltered savings options first-time homebuyers need to know about

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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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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.

  1. None

    If you owe the CRA money, pay up as soon as possible because the prescribed rate is rising again

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    CRA gives separated couples another chance at using RRSPs to buy a home

  3. The Canada Revenue Agency has strict rules around tax-loss selling and repurchasing what you just sold.

    Tax-loss selling in July? Don’t get tripped up by the ‘superficial loss’ rules

  4. A person looks at a Canada Revenue Agency homepage.

    Taxpayer relying on CRA website info gets hit with penalty for contributing too much to TFSA

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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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