Taxes

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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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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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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.

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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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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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.

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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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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Most Canadians have contributed to a charity or not-for-profit organization this year despite a challenging economic environment, high inflation and rising interest rates.

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Indeed, 71 per cent say they have contributed, primarily by giving money (51 per cent) or making a physical donation, such as clothing, household items or food (48 per cent), according to a new Canadian Imperial Bank of Commerce poll conducted by Maru Public Opinion. The top reason given by those who didn’t donate was that they couldn’t afford it (60 per cent), while only 22 per cent cited distrust in how charities used financial contributions.

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Most donors prefer to support local causes and actively seek out charities where they think their donations will make a difference. Social-service (33 per cent) and health organizations (30 per cent) top the list, followed by animal welfare and wildlife preservation charities (21 per cent), child and youth support (18 per cent), local and international reduction of poverty charities (18 per cent), and religious organizations (18 per cent).

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But of highest relevance to this columnist is that the poll found most Canadians lack a solid understanding of the tax benefits associated with charitable contributions, particularly those related to donating publicly traded securities.

The survey found that just 42 per cent have a strong understanding of the tax benefits associated with making charitable donations, yet 51 per cent said the ability to receive a tax credit increases the likelihood they will donate.

Only 31 per cent said they are aware of the tax advantage in donating publicly traded securities “in-kind,” and just seven per cent have made this type of donation. Perhaps not surprisingly, higher-income Canadians were almost twice as likely (12 per cent) to make donations of appreciated securities.

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With this poll data in mind, here are five things to consider before Dec. 31 to make the most, tax-wise, of your charitable donations in 2022.

Understand the tax benefits of donations

Giving cash, either by cheques, credit card or online payment, is straightforward and, as with any type of donation, allows you to receive a tax receipt to claim both federal and provincial non-refundable tax credits.

On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. The credit rate jumps to 29 per cent for cumulative donations above $200 (or 33 per cent if you have income subject to the top 33-per-cent federal rate, which is income of more than $221,708 in 2022). Parallel provincial credits work similarly, providing most Canadians with a minimum combined federal/provincial tax credit worth at least 40 per cent for donations above $200 annually.

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Donate appreciated securities in-kind

In-kind donations of publicly traded shares, mutual funds or segregated funds to a registered charity give you a tax receipt equal to the fair market value (FMV) of the securities or funds being donated, and allow you to avoid paying capital gains tax on any accrued gain.

A similar rule applies to the donation of securities obtained through the exercise of employee stock options. You may be able to avoid paying tax on employee stock option benefits by donating the obtained securities in-kind to a charity within 30 days of exercise.

Donate depreciated securities

To date, 2022 has not been kind to equities, making December the ideal time for tax-loss selling. An alternative may be to consider donating those securities with accrued capital losses to charity. You’ll get a receipt for the FMV of the shares being donated, and you can use the capital loss triggered on the donation to offset any other capital gains realized in 2022.

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Keep in mind that unlike appreciated securities, you don’t actually have to donate your loss securities in-kind to use the loss. You can sell them and then donate the cash.

Any unused net capital loss in 2022 can also be carried back up to three years (or carried forward indefinitely) to be applied against taxable capital gains in those years. Perhaps it’s worth taking one last look at your 2019 tax return to see if you reported any capital gains that year, since 2022 is your last chance to carry back a loss to that year to recover taxes paid on those gains.

Donate RRSP/RRIF withdrawals

Any funds withdrawn from your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) are taxable in the year of withdrawal at your marginal tax rate. Depending on your province and tax bracket, donating your RRSP/RRIF withdrawal to charity can often result in a donation receipt worth more in tax credits than the tax you will face on that withdrawal, which may reduce tax on other income.

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Consider a donor-advised fund

Finally, consider establishing a donor-advised fund (DAF) as an alternative to setting up your own private foundation. DAFs are useful if you’re not quite sure where to donate this year, but still want to claim a charitable tax credit for 2022.

DAFs are offered through some public foundations, such as community foundations or those affiliated with major financial institutions or investment management firms. They allow a donor to set up a fund within the larger, public foundation.

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The donor opens their fund by making a gift of cash (or appreciated securities) to the DAF and gets an immediate donation receipt. The funds can grow inside the DAF tax free, and each year the donor can recommend distributions (typically a minimum of five per cent of the average FMV of their fund each year) to be made from the DAF to any of the 86,023 registered charities or qualified donees in Canada.

The biggest advantage of a DAF is that the donor doesn’t have to worry about the administrative details of running a private foundation, or any record keeping. The foundation will process all donation requests and transfer the funds to the charities chosen, as well as track the DAF and provide regular updates on the fund’s performance.

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A DAF also provides confidentiality. Whereas you can look up all the details and financial information of any private foundation on Canada Revenue Agency’s website, if you establish a DAF, your individual fund information, including that you even have a DAF, is kept private and is not searchable by the general public.

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

Note: The CIBC survey was conducted by Maru Public Opinion, using its sample and data collection experts at Maru/Blue, on Nov. 28-29, 2022, among a random selection of 1,515 Canadian adults who are Maru Voice Canada online panelists. The data was weighted to match the population Census data. For comparison purposes, a probability sample of this size has an estimated margin of error of +/-2.5 per cent, 19 times out of 20.

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Most Canadians likely associate the month of April with taxes, but it’s actually the month of December that should get all the attention.

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This is especially true if you’re a post-secondary student and currently the beneficiary of a registered education savings plan (RESP), or the parent of someone who is. That’s because if you’re strategic each year in the timing and amounts of your RESP withdrawals, you may be able to get all the funds out of the plan tax free. This is true even for larger plans, given the new guidance from the Canada Revenue Agency on what is considered a “reasonable” expense for educational purposes.

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Before reviewing my end-of-year RESP withdrawal strategy as well as the new CRA guidance, let’s briefly recap the RESP basics. An RESP is a tax-deferred savings plan that allows parents (or others) to contribute up to $50,000 per child while saving for post-secondary education. The addition of government money in the form of matching Canada Education Savings Grants (CESGs) can add another $7,200 per beneficiary to the plan.

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Contributions made to an RESP, which were not tax-deductible when contributed, can generally be withdrawn tax free when it comes time for postsecondary education. These are called “refund of contributions,” or ROCs. If not withdrawn for education, however, CESGs may need to be repaid.

Any other funds coming out of the plan for post-secondary education are referred to as “educational assistance payments,” or EAPs. This includes the income, gains and CESGs in the RESP. These are taxable when paid out to the student, who may end up paying little or no tax based on the availability of various tax credits and whether they had other income in the year.

At first glance, it might seem attractive to only withdraw ROCs, since they are simply non-taxable, if the goal is to minimize the family’s taxes throughout the entire course of the kids’ studies, but it’s probably better to create some income each year in the form of EAPs to fully utilize the student’s annual basic personal amount (BPA) and, potentially, other available credits.

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The enhanced federal BPA for 2022 is $14,398 (increasing to $15,000 in 2023). That means a student can have taxable income from all sources up to this amount before paying any federal tax.

December, therefore, is the ideal time for post-secondary students to take a look at their total estimated 2022 income, whether it be from a part-time job, a summer job or even an investment account. They can then use this information to determine how much in EAPs to receive before the end of the year, taking into account the enhanced basic personal amount and the tuition tax credit, as well as any other credits the student may be entitled to such as donation, medical expense or disability tax credits.

For example, a student who had zero income in 2022 could withdraw approximately $21,000 in EAPs with no federal tax by claiming the 2022 enhanced federal BPA of $14,398 and assuming they paid undergrad Canadian tuition fees of about $6,800 (the current average), which are eligible for the federal tuition tax credit.

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In most provinces, the provincial tax would also be zero, since students can claim a non-refundable provincial BPA, along with provincial tuition tax credits in all provinces other than Alberta, Saskatchewan and Ontario.

Alternatively, the student may only wish to take EAPs up to the federal BPA of $14,398, allowing the tuition to be transferred to a (grand)parent, spouse or partner (up to the $5,000 maximum transfer limit).

That said, there is no requirement that the money taken out of the RESP be specifically used towards the actual strict cost of education, such as tuition, books, etc. As long as the student is enrolled in a qualifying post-secondary program, “reasonable” EAPs can be paid to the student and the student can then choose to use the funds to pay for rent, food or any other expense that assists the student in furthering their post-secondary level education.

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For 2022, the CRA allows each beneficiary of an RESP to receive up to $25,268 ($26,860 in 2023) in EAPs without having to demonstrate to the RESP provider whether such a withdrawal request is reasonable. Given this limit, the student could then receive an additional $4,268 on top of $21,000 in EAPs as discussed above, and pay only minimal tax on this EAP, at marginal rates ranging from 20 per cent (Ontario) to 27.5 per cent (Quebec), if the student’s total 2022 income stays in the lowest provincial bracket.

If, however, the RESP is quite large or the student’s spending needs exceed this annual EAP threshold, the RESP provider must determine the reasonableness of the expenses and can do so by asking for additional information and documentation, including receipts.

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Last month, for the first time ever, the CRA provided a list of what it thinks are reasonable and unreasonable expenses. Reasonable expenses include: tuition, course materials, textbooks, student fees; moving expenses to and from school; rent and utilities; a computer/laptop and cellphone; internet and phone bills; basic personal needs while at school, including toiletries, clothing and food; “basic” furniture and housing needs, such as bedding, towels, plates and cutlery; transportation to move in and out from school and during official school breaks; local transportation costs while at school, and even the purchase of a car, if it is in the student’s name and used to transport the student to and from school and school-related activities.

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The CRA’s list of unreasonable expenses include: trips for family members to visit the student; arts, culture and entertainment, such as museums, fine dining, movies, plays, sporting events, concerts and festivals; personal care, like hair, spa and wellness treatments; travel unrelated to school, such as vacations; and a down payment on a home.

At the end of the day, however, it’s up to RESP providers, which have the ultimate responsibility for issuing EAPs, to determine what they consider to be reasonable, and they have the authority to be more restrictive than what’s listed in the CRA’s newest guidelines.

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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Canada’s new anti-flipping rules for residential real estate are scheduled to come into force on Jan. 1, 2023, and are designed to “reduce speculative demand in the market place and help to cool excessive price growth.”

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The new tax law will disallow the use of the principal residence exemption to shelter the capital gain realized on the sale of your home if you’ve owned it for less than 12 months, allowing for certain exceptions such as death, disability, separation and work relocation. Instead, the gain will be 100 per cent taxable as business income.

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But the Canada Revenue Agency isn’t waiting around for this new legislation to come into force. It’s currently challenging perceived real estate “flips” through the court system, with mixed results, depending on the facts of the case.

The most recent example involved a Toronto homeowner who went to Tax Court to challenge the CRA’s denial of her principal residence claim.

The taxpayer was reassessed by the CRA for her 2011, 2015 and 2016 taxation years in connection with the sale of four properties she owned at various times during that period. But it was the 2011 sale of her Toronto property that was most contentious, because the CRA assessed the taxpayer beyond the normal three-year reassessment period and imposed a gross negligence penalty for that year.

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In court, the taxpayer explained she experienced “tumultuous relations” with her now ex-husband from 2010 through 2014. She said this resulted in an off-again/on-again cohabitation, culminating in a final separation and divorce in 2015. The taxpayer testified that during 2010 and 2011, she was frequently at the house in question “as a refuge from the acrimonious and abusive relationship with her now ex-husband.” She argued this house was her principal residence, so it should have been exempt from capital gains tax when she sold it in 2011.

The CRA disagreed, maintaining the property was acquired and disposed of as “an adventure in the nature of trade” and so its sale should be classified as 100 per cent taxable business income. It argued the taxpayer never changed her primary address, employer T4 address or other mailing addresses to this property, so its position was that she “flipped” the property after completely reconstructing it, in a relatively short period of time, for a large profit.

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The Tax Court was ultimately tasked with deciding four basic questions with respect to the 2011 disposition of the home.

Should the sale be properly classified as an adventure in the nature of trade and, therefore, taxable as business income or as capital property, thereby affording it capital gains treatment? If it was capital property, was it the taxpayer’s principal residence, thus allowing the gain to be tax free? Was there sufficient misrepresentation on the taxpayer’s 2011 tax return (that is, the non-reporting of the property’s sale) to even allow the CRA to reopen the 2011 tax year, which would have otherwise been statute-barred and beyond the normal three-year reassessment period? And, finally, was the taxpayer grossly negligent in filing her 2011 tax return and thus subject to a gross negligence penalty?

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After analyzing the facts and circumstances of the case, the judge concluded the taxpayer “hardly fits the factual mould of usual ‘flippers’ of real properties.” She was a teacher, not a real estate agent, and she had other circumstances that explained the “less-than-measured tenure of ownership,” namely her abusive, on-again/off-again marriage that she was trying to leave physically and legally.

“This was not a late-breaking story,” the judge noted. “It figured prominently in the file during CRA’s audit and file notes and it explained away her literal ‘comings’ and ‘goings.’”

Ultimately, the judge found that the nature of the property, length of ownership, the taxpayer’s limited frequency of real estate endeavours up to that point, work expended, motive and, most importantly, circumstances dictating the property’s sale all led to the conclusion that the property was acquired as a capital property, rather than to flip it.

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Once the judge determined the home was capital property, the next question was whether it could be considered her principal residence at the time, and thus exempt from tax upon sale. The judge noted the property was never occupied with any regularity and there were “no identifiable changes of address, permanent hallmarks or other domestic expenses and touches, beyond mandatory utilities.”

The judge, in ruling the gain was taxable because it was not her principal residence, concluded that “while she may retrospectively believe (the property) to have been her permanent domicile, her present belief cannot assuage the (CRA’s) assumptions without some additional evidence.”

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The judge then turned to the question as to whether there was a misrepresentation on her 2011 return owing to “neglect, carelessness or wilful default” in not reporting the sale of the home. The judge found the taxpayer lacked any “details and material to show reasonably that she may have been correct” in her filing position, so the CRA was within its right to reopen and reassess the 2011 tax year, even beyond the normal reassessment period.

Finally, the judge turned to the issue of gross negligence, and concluded the taxpayer should not be held to be grossly negligent in adopting her filing position that the home was her principal residence so she believed the gain need not be reported on her 2011 return.

He cancelled the gross negligence penalties, noting “(the taxpayer), while educated, is clearly unfamiliar with the ways of business and tax. Her belief she could navigate the tax laws because it related to personally held real property was ill-founded. However, based on all the facts, it was not tantamount to a deliberate act, refined to indifference of compliance with the law.”

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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