Two quarterly newsletters have been added—one about personal issues, and one about corporate issues. They can be accessed below.

Corporate:

Issue #20 Corporate

Personal:

Issue #20 Personal

While it didn’t get a lot of attention in the coverage of the 2012-13 federal Budget (brought down at the end of March), one of the budget announcements was definitely good news for the small business sector, as the EI hiring credit which had been available during 2011 was extended for another year.

One of the perennial concerns of small businesses is the number and variety of levies which they pay to governments at all levels and the effect of those payments on the bottom line. At the federal government level, businesses must pay, in addition to income tax, Canada Pension Plan contributions and Employment Insurance premiums on behalf of their employees. Where an employee earns in excess of about $50,000 per year, the employer’s share of those levies reaches almost $3,500 for the year.

In last year’s budget, the federal government proposed and implemented a “hiring credit” for small business, which provided a non-refundable credit of up to $1,000 against any increase in the employer’s EI premiums payable over the previous year’s amount. As the EI premium rate did not increase substantially on a year-over-year basis, any significant increase in an employer’s EI premiums liability for the current year over the previous one would generally arise as the result of taking on new employees. In effect, the credit covered up to the first $1,000 of EI premiums payable by the employer for new hires during the year.

As the intent of the credit was to benefit small and medium sized businesses, limits were placed on the size of the companies which could claim the credit. Specifically, the credit was available only to companies whose total EI premiums for the immediately previous year were less than $10,000.    

In this year’s budget, the federal government announced that the credit will similarly be made available during 2012 to employers whose EI premium liability during 2011 was less than $10,000. As was the case last year, the credit will cover up to the first $1,000 of any year-over-year increase (i.e., from 2011 to 2012) in the EI premiums payable by the employer.

Any such increase in premiums must be paid “up front”, when the employer business remits its source deductions in the usual way. However, there is no need to make an application for the hiring credit, as any credit will automatically be calculated by the Canada Revenue Agency (CRA) and applied as a credit on the employer’s payroll account with the Agency.  More information on the credit for 2012 can be found on the CRA Web site at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/hwpyrllwrks/stps/hrng/hcsb-2012-eng.html.

As gas prices across Canada climb past the $1.30/litre mark, and some predictions are for $1.50/litre (or higher) gas costs by the summer, consumers are looking for just about any way to reduce their cost of getting around.

For most of us, the purchase of gasoline is, for all practical purposes, a non-discretionary expense. Since the money has to be spent, the question becomes this: Does our tax system offer any relief by way of a deduction or credit for the cost of driving? The answer, as it usually is in tax, is yes … and no. The bad news for most employee taxpayers is that the cost of driving to work and back home, and the cost of most non-work driving is considered a personal expense, for which no deduction or credit is allowed, no matter how high the cost gets. The news is not, however, uniformly bad. The self-employed, of whom there are an increasing number, can claim a deduction for business-related driving expenses. As well, all taxpayers are permitted to claim a deduction for driving or travel expenses incurred for certain specific purposes, like moving to take a job or travelling to obtain medical care. And, finally, for those who decide that the daily commute has just become too costly and turn to public transit (which includes everything from subways to suburban commuter trains to ferries) as an alternative, a tax credit is available to help offset the cost of that transit.

Where employees are required, as part of their terms of employment, to use their own vehicle for work-related travel (e.g., someone who is required to visit clients at their own premises for the purpose of meetings or other work-related activities), tax relief is available for the related costs. If the employer is prepared to certify on a Form T2200 that the employee was ordinarily required to work away from his employer’s place of business or in different places, that he or she is required to pay his or her own travelling expenses and that no tax-free allowance is provided by the employer for such expenses, the employee can deduct actual expenses incurred (including the cost of gas) for such work-related travel. It goes without saying that the employee must, in order to claim that deduction, keep a record of work-related travel done as well as records of travel-related expenses incurred.

The rules governing the taxation of employee automobile allowances and available deductions for employment-related automobile use (summarized on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/slry/mtrvhcl-eng.html), can be complicated. However, given the recent run-up in the cost of gasoline, as well as the anticipated increase ahead, it’s likely worth ensuring that every possible dollar of eligible expenses incurred as a result of employment-related car use is claimed.

Our tax system also permits a deduction for driving or other travelling costs incurred where a taxpayer moves to take a job (which would include students moving to take up a summer job) as well as for travelling costs which are incurred in order for the person or a member of their family to receive medical treatment.

Where it’s necessary to move to take up employment or self-employment, the costs of that move can be deducted from income earned at the new job. When it comes to travelling costs, the taxpayer has the option of either itemizing the various costs incurred (including operating expenses such as fuel, oil, tires, license fees, insurance, maintenance, and repairs and ownership expenses such as depreciation, provincial tax, and finance charges) for the year and then claiming a pro-rated amount which reflects the percentage of kilometres driven which relate to the move. Such an approach requires a fair amount of record keeping and many taxpayers choose instead to claim the standardized per kilometer rate provided by the federal government. For 2011 (the 2012 rates will be posted on the Canada Revenue Agency Web site early in 2013), that standardized rate ranges from 49.0 cents per kilometer in Manitoba to 63.5 cents per kilometer in the Yukon Territory. Where the standardized rate is claimed, no receipts are required, but the taxpayer is required to keep a record of the number of kilometers travelled in relation to the move.

The same approach (itemized approach or standardized rate claim) applies where a taxpayer is claiming travelling expenses related to medical care. The basic rule for claiming travel expenses in such circumstances requires the taxpayer to travel at least 40 kilometres (one way) from his or her home to obtain medical services which were not available any closer to home. Where that requirement is met, the taxpayer may claim the public transportation expenses paid (for example, taxis, buses, or trains) as medical expenses. Where public transportation is not readily available, the taxpayer may be able to claim a pro-rated share of vehicle expenses (both operating expenses and ownership expenses, with receipts, as outlined above) or opt for claiming the standardized per-kilometre rate. As is the case with all medical expense claims, a claim is available only where the total amount claimable exceeds the lesser of 3% of net income or (for 2012) $2,109.
 
Finally, where a taxpayer decides that driving is just too expensive and opts instead for public transit, a tax credit for the cost of using that public transit is offered by the federal government and by several of the provinces, and there is no limit on the amount which may be claimed. The federal credit is calculated as 15% of the cost of public transit, and while provincial credit amounts vary, an average would be around 7%. A taxpayer would therefore be able to claim a credit (and reduce taxes which would otherwise be payable for the year) by 22% of eligible public transit costs incurred during that year.

The public transit tax credit isn’t limited to costs incurred for transit use to and from work. Costs incurred by either spouse and by any dependent children under the age of 19 who regularly purchase a weekly or monthly transit pass (e.g., high school or university students who use transit to get back and forth from school) can be aggregated and claimed on the return of either parent for the year. So, a family of four that incurs $600 a month in transit costs (not difficult to do where an inter-city commuter pass can cost up to $300 a month and city transit passes, even for students, can cost up to $100) can claim $7,200 in eligible transit costs per year, for which they would be able to reduce their tax bill for the year by just under $1,600.

No amount of tax relief is going to make driving, especially for a daily commute, an inexpensive proposition. But, that said, seeking out and claiming every possible deduction and credit available under our tax rules can at least help to minimize the pain.

By now, most Canadian taxpayers (except the self-employed and their spouses, who have until June 15) will have filed their 2011 income tax returns. It’s quite often the case that a taxpayer will realize, after the return is filed, that information has been inadvertently misstated, or perhaps amounts have been omitted where an information slip was received after the return was sent, or even that claims have been made for deductions or credits to which the taxpayer is not actually entitled.

In such situations, the taxpayer is often at a loss to know how to proceed, but the process for amending a return is actually straightforward. The first reaction in such circumstances is sometimes simply to file another, corrected return, but that’s not the right solution. Instead, the taxpayer should wait until a Notice of Assessment is received in respect of the return already filed, and then file a Notice of Adjustment with the Canada Revenue Agency (CRA), making the necessary corrections. A Notice of Adjustment can be filed in a number of ways. The easiest and quickest way of doing of so is through the CRA Web site’s “My Account” feature, but that option is available only to taxpayers who have registered to obtain a CRA ID and password. While doing so isn’t difficult (the steps to be taken to do so are outlined on the Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html, it does take a few weeks to complete the process. Taxpayers who don’t want to deal with the CRA through the Web site, or who don’t think it’s worth registering just to deal with the Agency on a single issue can obtain hard copy of the T1 Adjustment form from the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/t1-adj-11e.pdf or by calling the CRA Forms request line at 1-800-959-2221. The use of the actual form isn’t mandatory—a letter to the CRA signed by the taxpayers is an acceptable alternative—but using a standardized form has two benefits. First, it makes it clear to the CRA that an adjustment is being requested, and two, filling out the form will ensure that the CRA is provided with all the information needed to process the requested adjustment.  Once the form or letter is completed, it should be mailed or faxed to the Tax Centre to which the original return was sent. A taxpayer who isn’t sure anymore where that was can go on the CRA Web site at  http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html and, by selecting his or her location from a drop-down menu of provinces and cities, can obtain the address of the Tax Centre (not the Tax Services Office) to which the adjustment request should be sent.

Sometimes it’s the CRA who discovers that a return is incomplete or that further information is needed to properly assess the return. In such circumstances, the Agency will contact the taxpayer even before the return is assessed, to request further information or documentation of deductions or credits claimed (for example, information on the custody of a child where one parent has claimed an equivalent to spouse deduction, or receipts documenting child care expenses claimed). In all cases, the best thing to do is respond to such requests promptly, and to provide the requested documents or information. The CRA can assess only on the basis of information with which it is provided, and where a request for information or supporting documents for a deduction or credit claimed is ignored by the taxpayer, the assessment will proceed on the basis that that such support does not exist. Providing the requested information or supporting documents can often resolve the question to the CRA’s satisfaction, and the assessment of the taxpayer’s return can then proceed.

Of all the measures announced in the 2012-13 federal Budget brought down on March 29, it was the changes to Canada’s Old Age Security (OAS) system which will likely have the greatest impact on the largest number of Canadians. Under pre-budget rules, Canadians become eligible to receive OAS the month in which they turn 65, although the first payment is actually received the following month.

Changes to the OAS system were widely expected to be included in the budget, and the announced changes were, for the most part, as predicted. Specifically, the federal government announced that the eligibility age for receipt of OAS benefits would be raised from the current age of 65 to age 67. The change will, however, be deferred until 2023 and then implemented over a six-year period between April 2023 and January 2029.

The Budget also included an unexpected announcement that OAS recipients would, effective July 1, 2013, have the option of deferring their receipt of OAS benefits for up to five years. Such an option already exists for Canada Pension Plan (CPP) benefits and, as is the case with CPP benefits, deferral of OAS benefits will mean a larger monthly amount when benefits are received.

While the announced changes are, on their face, relatively straightforward, the combination of the lengthy phase-in period and the new option to defer receipt of OAS benefits can cause some difficulty in determining just how the changes will apply in an individual situation. An explanation of how the changes will apply to different age groups follows.

Current recipients of OAS benefits

Canadians who are currently receiving OAS benefits are completely unaffected by the changes announced in the budget. Both the timing and the amount of their monthly benefits will continue without change.

Canadians born after June 30, 1948 and before April 1, 1958

Those born between these two dates will be eligible to receive OAS benefits once they turn 65—they are not affected by the increase in the eligibility age. However, as everyone in this age group will be eligible to begin receiving benefits in July 2013 or later, they will have the option of deferring receipt of those benefits for up to five years.

Where receipt of OAS benefits is deferred, the amount of the benefit increases with each month of deferral. The budget papers provide the following two examples of the effect of a short-term and a long-term deferral on the amount of OAS benefit received.

Example #1

Michael will be turning 65 in September 2013.

Instead of taking up his OAS pension at age 65, he plans to continue working a year longer and defer the pension until age 66.

When he takes up his OAS pension at age 66, his annual pension will be $6,948 instead of $6,481 (in 2012 dollars).

Example #2

Rita will be turning 65 in December 2013.

She plans to continue working as long as she can. She prefers to forgo her OAS pension for the maximum deferral period of five years so that she can have a substantially higher annual pension amount, starting at age 70.

When she takes up her OAS pension at age 70, her annual pension will be $8,814 instead of $6,481 (in 2012 dollars).

Canadians born after March 31, 1958

This is the group of Canadians who will be affected by both the increase in the eligibility age for receipt of OAS benefits, and by the option to defer benefit receipt by up to five years. The following chart, taken from the federal Department of Finance Web site, outlines the age at which benefits may first be received by those born after March 31, 1958. It can be seen from the chart that Canadians born after January 31, 1962 will not be eligible to receive OAS benefits until they reach the age of 67.

 While this group will have receipt of their OAS benefits delayed beyond the age of 65, they will also be entitled, if they so choose, to defer receipt of the benefits for an additional period of up to five years past their eligibility date, as outlined in the examples above.

Canadians who receive OAS benefits may also be eligible to receive the Guaranteed Income Supplement (GIS), which is made available to lower-income seniors. The changes to the OAS system will also affect receipt of the GIS. Specifically, as GIS payments are tied to OAS, eligible seniors will not receive any GIS payments until payment of their OAS benefits begins.

In view of the number of Canadians who will be affected by the announced changes to the OAS system, the federal government has posted explanatory information, including an FAQ document, on its Web site, and that information can be found at http://www.servicecanada.gc.ca/eng/isp/oas/changes/index.shtml.

By the time most Canadians sit down to gather together information slips and receipts to prepare their 2010 tax return, any opportunities to minimize tax payable for the year are, for the most part, gone. Most tax-planning or tax-saving strategies, in order to be effective for 2010, would have to have been put in place by the end of that calendar year. The major exception to that rule is, of course, registered retirement savings plan (RRSP) contributions, but even those had to have been made by March 1, 2011 in order to be claimed on the 2010 return.

Notwithstanding, all is not lost by tax return filing time, as there are some tax-planning strategies (more properly described as tax-filing strategies) which can still minimize the tax bite for the current year or future ones. What follows is an outline of some of the tax-filing strategies which are available to many, if not most, Canadian taxpayers.

Figuring out what to claim

It would seem to make intuitive sense to claim whatever eligible costs you have incurred during the year in order to minimize your tax bill or increase your refund. But, in some areas, “giving away” your deductions to other family members or deferring the claim until a future year can actually give you a much better tax result than just automatically claiming whatever amounts are available as those costs are incurred.

Taxpayers who are married enjoy some advantages in this area. By law, medical expenses incurred within a family (that is, by each spouse or by their children) can be claimed by either spouse. As well, charitable donations made by married individuals can be claimed by the person who made the donation or by his or her spouse. The ability to transfer or combine the amounts matters because, in the case of medical expenses, amounts claimable must pass certain income thresholds and, in the case of charitable donations, the credit percentage rises as donation amounts increase. Finally, costs incurred by members of a family for public transit use can be combined to ensure that they are claimed by the family member or members who can make the best use of them for tax purposes.

Medical expense claims

Under Canadian tax law, a 15% federal tax credit (as well as a provincial credit, the amount of which varies, depending on the taxpayer’s province of residence) may be claimed for qualifying medical expenses over a specified income threshold. Federally, for 2010, that threshold is equal to the lesser of $2,024 or 3% of net income. Consequently, it makes sense to maximize the amount of claimable expenses by having one member of the family make the claim for qualifying expenses incurred by all family members, and for the person claiming to be the lower-income spouse.

 It is also possible to plan around the timing of medical expenses. Medical expenses claimed on a tax return can be any qualifying expenses incurred in any 12-month period which ended during the tax year. So, it makes sense to pick the 12-month period which maximizes the amount of expenses. Take, for instance, a family whose medical expenses were not out of the ordinary during 2010 but who incurred significant medical expenses (perhaps for unexpected dental care costs or prescription drug expenses) in the first two months of 2011. When filing the return for 2010, it might make sense to defer the claim for medical expenses paid during 2010, where that claim might only produce a small credit or no credit at all, and the medical expenses incurred during calendar 2010 would be “wasted” from a tax point of view. When the 2011 return is filed at this time next year, claiming all medical expenses incurred between March 1, 2010 and February 28, 2011 might produce a better tax result. Because each case is different, in terms of when medical expenses are incurred, and the income of the taxpayer or taxpayers for different tax years, there are no real rules of thumb which can determine when it makes sense to defer a medical claim. In all cases, it’s a matter of doing the calculations to determine which claim period produces the best tax result.

Claiming charitable donations

Our tax system provides a credit, at both the federal and provincial levels, for all charitable donations made. Unlike the medical expense claim, the income of the taxpayer plays no part in determining the availability or amount of such a claim. However, our tax system does reward more generous donors, in that the percentage amount of the credit increases as donation levels rise. Specifically, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation amount, while donations over $200 qualify for the same non-refundable tax credit at the rate of 29%.

As noted above, charitable donations made by an individual can be claimed by that individual or by his or her spouse. Since the credit percentage increases as donation levels rise, it only makes sense to combine the donations made by both spouses and claim them on one return. Since the available credit is unaffected by income level, it doesn’t matter which spouse makes the claim, with one caveat. Since the credit is non-refundable, it should only be claimed by a taxpayer who has an actual tax liability for the year.

Taxpayers also have some flexibility in timing the claiming of their charitable deduction contributions. Contributions made can be claimed in the year they are made or in any of the five successive taxation years. So, it will usually make sense, where donation amounts for a single year do not exceed the $200 threshold, to wait and aggregate donations made in two or more years, in order to maximize the credit claimable.

Public transit tax credit

Millions of Canadians use public transit every day to get to and from work or school, and the cost of such public transit use can run to hundreds of dollars each month. In order to encourage the use of public transit, the federal government provides a non-refundable tax credit to taxpayers who purchase monthly (or longer) transit passes throughout the year. The cost of shorter duration passes may also qualify for the credit if they are for a minimum 5-day period and enough of them are purchased to provide the purchaser with 20 days of unlimited travel each month.

The credit itself is equal to 15% of the amount of eligible public transit costs incurred, with no limit on that amount. So, a taxpayer who purchased a $250 monthly commuter train pass each month for the entire year could claim a credit of $450. ($250 ×12 ×15%) and reduce his or her federal taxes by that amount.

The full potential of the public transit tax credit, however, is realized when eligible public transit costs incurred by members of a family are combined. Many users of public transit are high school or university students, who use transit for reasons of economy. However, for most such students, their income for the year is unlikely to be high enough (over about $10,000 for 2010) to result in a federal tax liability. Since the public transit credit is a non-refundable one, meaning that it can only reduce federal tax otherwise payable and can’t create or increase a refund, it’s of no use to someone who doesn’t pay federal tax. And, since the credit can’t be carried over, but must be claimed in the year the qualifying expense is incurred, any potential credit in the hands of someone who isn’t taxable for federal purposes would simply be lost.

Recognizing this reality, the federal tax rules governing the public transit tax credit permit all eligible costs incurred by a taxpayer, his or her spouse, and any of their children who are under the age of 19 (which would in many cases include children at university) to be combined and claimed on either spouse’s return, as follows. If the taxpayer in the example above spent $3,000 ($250 per month) for eligible public transit costs, his or her spouse spent a like amount, and each of their two teenage children incurred $100 per month in eligible public transit costs, then the total claim would be as follows:

Taxpayer - $3,000

Spouse - $3,000

Teenage child - $1,200

Teenage child - $1,200

TOTAL - $8,400 ×15% = $1,260

It doesn’t matter which spouse claims the total eligible public transit costs of $8,400, as the total credit will remain $1,260, no matter who makes the claim. What matters is that the person making the claim has at least $1,260 in federal tax payable after all other non-refundable credits (e.g., personal credit) are claimed, so that that credit can be fully utilized.

As the tax filing deadline gets closer and closer, it’s true that the chances to make any really significant changes to one’s tax liability for the year diminish. But, nonetheless, paying close attention to the details when filing can produce a better bottom line result—and an incentive to start planning earlier next year!

Unlike contributing to an RRSP or a tax-free savings account (TFSA), the idea of splitting pension income as a tax-planning strategy doesn’t get a lot of attention in the media. That’s unfortunate for a couple of reasons. First, the splitting of pension income can provide significant tax savings to those able to utilize it—generally older taxpayers who in many cases are living on a fixed income and can really benefit from the tax savings received—especially in the current low interest rate environment. Second, unless you’re getting good tax-planning advice, it’s very easy to overlook pension income splitting as a way of reducing your tax burden. The only references to pension income splitting on the annual return are two entries, one on line 116 and the other on line 210 and, unless you are already aware of the significance of those entries, there’s really nothing to alert you to it. The Income Tax and Benefit Guide provides very little in the way of explanation and no indication at all of the benefits which may be obtained. In addition, the form which must be filed to effect a pension income splitting strategy isn’t part of the standard tax return package provided to taxpayers by the Canada Revenue Agency (CRA)—taxpayers must ask for it and obtain it separately.

The general rule is that taxpayers receiving private pension income (including a pension received from former employer and, where the recipient taxpayer is over the age of 65, payments from a registered retirement savings plan or a registered retirement income fund) are entitled to split up to half that income with a spouse for tax purposes. (Government source pension income, like payments from the Canada Pension Plan or Old Age Security payments do not qualify for pension income splitting.) A number of the provinces have also indicated that they will adopt the federal rules for provincial tax purposes.

While the concept and general rules governing pension income splitting aren’t particularly complex, the splitting of pension income has some fairly wide-ranging, beneficial tax consequences for the taxpayer and his or her spouse.

The mechanics of pension income splitting are relatively simple. There is no need to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify the pension plan administrator. In addition, the decision of whether and to what extent to split pension income for tax purposes does not have to be made until the return for the year is being completed. Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032, Joint Election to Split Pension Income, with their annual tax return, and the form is available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1032/t1032-10e.pdf.

On the T1032, the taxpayer receiving the private pension income and the spouse with whom that income is to be split must make a joint election to be filed with their respective tax returns for the particular tax year. Since the splitting of pension income affects both the income and the tax liability of both spouses, the election must be made and the form filed by both spouses—an election filed by only one spouse or the other won’t do.

In addition to filing the T1032, the spouse who actually receives the pension income must deduct from income the pension income amount allocated to his or her spouse, on line 210 of his or her return for the year. And, conversely, the spouse to whom the pension income is being allocated is required to add that amount to his or her income on the return, this time on line 116.

As well as reporting the pension income “received” and claiming the corresponding deduction on lines 116 and 210, there’s a requirement that, where tax has been withheld from the income to be split, that tax must be allocated on the return for the year in the same proportion as the pension income is allocated. The formula for doing so is outlined in Part 5 of Form 1213.

Finally, taxpayers receiving private pension income can claim a non-refundable federal tax credit of up to $2,000 on their returns for the year. The actual credit claimable is equal to the amount of qualifying pension income earned or $2,000, whichever is less. The CRA has confirmed that where pension income is split, the amount of such income reported for tax purposes by each spouse will be used to determine eligibility for and the amount of any pension income credit. For example, where a taxpayer who receives $10,000 in eligible pension income for the year allocates 50% of that amount, or $5,000, to a spouse, each spouse will be able to claim the full $2,000 pension tax credit on his or her return for the year the income is reported, thereby saving an additional $300 in federal income taxes. 

The ability to split pension income between spouses has the potential to achieve real and permanent tax savings and to enhance eligibility for certain federal tax credits and benefits. And, as long as the administrative requirements outlined above are followed, pension income splitting is a win-win strategy for eligible taxpayers.

It may seem like an obvious mistake to avoid, but every year some taxpayers pay unnecessary (and non-deductible) penalties and interest for no reason other than that they simply didn’t get their returns in on time. For the record, a 2010 personal tax return is late-filed if it isn’t sent to the Canada Revenue Agency (CRA) on or before May 2, 2011 or, if you or your spouse are self-employed, on or before June 15. In all cases, tax amounts owing due must be paid on or before May 2, 2011.

For some taxpayers, late-filing is just a matter of not having gotten around to it—few people view preparing their tax returns as anything other than an unpleasant chore. For others, missing or mislaid information slips are to blame. In many cases, where there is tax owing and the cash just isn’t available to pay those taxes, taxpayers assume that it’s better just to put off filing until the money is available and the payment can be made. Whatever the reason, not filing on time is, in all cases, the wrong decision.

Where the reason for not filing is missing information slips (for example, T4s or T5s), the best strategy is to estimate the amount and enter that estimate on the appropriate line of the return. It’s also a good idea, in such circumstances, to attach a note for the tax authorities, explaining that the slip wasn’t received, providing them with the name and address of the person or company which should have issued it and the kind of income involved (i.e., employment income or interest income), and explaining what steps have been taken (i.e., contacting the company or the bank) to get the missing information slip. While it’s a surprisingly common misconception, it’s not the case that if an information slip wasn’t received, the income doesn’t have to be reported for tax purposes.

In any case, where taxes are owed, late-filing means an automatic penalty will be imposed equal to 5% of those outstanding taxes, plus an additional 1% for every full month following during which the return is not filed, to a maximum of 12 months (or a total of 17% of the unpaid amount). As well, interest starts being charged on those unpaid taxes the very first day they are overdue. Few taxpayers realize that the interest rate charged by the CRA is, by law, well in excess of commercial rates of interest. Specifically, the rate of interest charged by the CRA is equal to its “prescribed rate” plus 4%, and any interest charges levied are compounded daily. The rate charged by the CRA from April 1 to June 30, 2011 will be 5%.

For taxpayers who make a habit of filing late, the news is even worse. If a late-filing penalty has been charged by the CRA in any of the previous three years, and another return is late-filed, both the immediate penalty and the recurring monthly penalty are doubled to, respectively, 10% and 2% per month, to a maximum of 20 months. In the very worst-case scenario, where the taxpayer was assessed a late-filing penalty within the previous three years and the current return is more than 20 months late, the penalty assessed can reach 50% of the unpaid tax amount.

Even where a refund is expected, and there is consequently no risk of incurring late-filing penalties, it doesn’t make sense to put off filing. While the CRA pays compound daily interest (at a rate of 3% for the April to June 2011 period) on overpayments of taxes, the interest clock on such payments doesn’t start running until the latest of the following three dates: May 31, 2011, the 31^st day after the return is filed or the day after the taxes are overpaid.

So, no matter what your situation, getting your return in on time makes sense. In the worst case scenario, it can save you from paying substantial interest and penalties (now or in the future) or, where a refund is expected, can get your money into your hands more quickly, perhaps with interest added.

If the constant flow of television commercials reminding taxpayers of the upcoming RRSP contribution deadline wasn't enough, the arrival of the 2010 tax return form and the issuance of tax information slips must leave taxpayers in no doubt that it's that time of year again. By the end of February or early March, taxpayers will usually have received all of the information needed to prepare their 2010 income tax returns. Issuers of T4s (for employment income) and T5s (for investment income, including interest and dividends) must send such information slips to employees, shareholders, and account holders by the end of February. Self-employed taxpayers, who must calculate their own business income for the year, will certainly be in a position to do so by the end of February. Finally, retirees who receive pension income, either from a former employee or from the Canada Pension Plan or Old Age Security program, will have received T4A information slips from the pension plan administrator or the government of Canada documenting that income for 2010.

If the constant flow of television commercials reminding taxpayers of the upcoming RRSP contribution deadline wasn't enough, the arrival of the 2010 tax return form and the issuance of tax information slips must leave taxpayers in no doubt that it's that time of year again. By the end of February or early March, taxpayers will usually have received all of the information needed to prepare their 2010 income tax returns. Issuers of T4s (for employment income) and T5s (for investment income, including interest and dividends) must send such information slips to employees, shareholders, and account holders by the end of February. Self-employed taxpayers, who must calculate their own business income for the year, will certainly be in a position to do so by the end of February. Finally, retirees who receive pension income, either from a former employee or from the Canada Pension Plan or Old Age Security program, will have received T4A information slips from the pension plan administrator or the government of Canada documenting that income for 2010.

The filing deadline for individual taxpayers (other than the self-employed and their spouses, who must file by June 15, 2011) is April 30, 2011. This year, however, taxpayers have a little extra breathing room. Since the April 30, 2011 filing deadline falls on a Saturday, a return will be considered by the Canada Revenue Agency (CRA) to be filed on time if it is received, or postmarked, on the next business day. For 2011, that day would be Monday, May 2. A similar extension applies to payments owed to the CRA.

Taxpayers who are expecting a refund are, however, well-advised to file as early as possible, as required processing times increase as the filing deadline looms. A return which might have been processed (and a refund issued) within three weeks if filed in early March will likely take twice that amount of time if filed in the last week of April. Taxpayers who will have a balance owing on filing and are disinclined to send that money to the CRA any earlier than absolutely necessary can still file well in advance of the deadline, and post-date the payment. As well, where there is a balance owed on filing, it's not necessarily a good idea to file as late as possible. Should the return be delayed in any way–for instance, through a computer or server crash or a postal delay, the return could end up arriving late, meaning that late-filing penalties and interest charges will be levied. In such circumstances, it's a better idea to file earlier and simply post-date the cheque to May 2, 2011.

For all taxpayers, including the self-employed, all taxes owed for the 2010 tax year are due and payable to the CRA on or before Monday May 2, 2011. No exceptions and, barring any extraordinary circumstances, no extensions are given. Taxpayers who are not in a position to pay taxes owing by the filing deadline sometimes put off filing, reasoning that there's no point to filing if the taxes owing from the return can't be paid. While that may seem logical, it's a mistake to file late, no matter what the reason. Where a tax return is late-filed, for any reason, the CRA levies a penalty calculated as a percentage of tax owing as of the filing deadline. The penalty varies, depending on whether the taxpayer has late-filed in the past, how often, and how recently that late-filing occurred, but the minimum penalty is 5% of taxes owed, plus interest on those taxes. A taxpayer who cannot come up with the money needed to pay taxes owed on filing should file anyway, and enclose a letter to the CRA explaining the reasons for the late payment. Generally, the CRA will be willing to set up a payment plan with the taxpayer through which the tax owing can be paid over time. While it's impossible to avoid the interest charges which will be levied where taxes are paid late, a taxpayer who nonetheless files the return on time will at least avoid the late filing penalty.

It's worth noting that while the CRA can and usually does notice and correct arithmetical and clerical errors which appear in returns, the CRA does not (and cannot) ensure that taxpayers claim all the deductions, credits, and benefits available to them. It's up to the taxpayer to ensure that the annual return is completed accurately and all available deductions and credits are claimed and received–or lost.

At one time, the deadline for filing a tax return and the options for filing it were straightforward–everyone had to file by April 30, and the paper-and-pencil return was the only option. While paper filing is still an option, it's one used by a diminishing number of taxpayers every year. With each successive filing season, more and more taxpayers turn to one of the three available forms of electronic tax filing (or e-filing)–E-FILE, NETFILE or TELEFILE. Since most Canadian taxpayers are eligible to use at least one of these electronic methods, the choice is often one of personal preference.

The simplest electronic filing method is probably TELEFILE. TELEFILE is useful for those who don't have or don't want to use a computer, or who aren't interested in purchasing the software needed to use other e-filing methods, but who still want to take advantage of the faster return processing time that e-filing offers. Taxpayers whose tax situation is relatively straightforward and who are therefore eligible to use TELEFILE will receive a four digit “access code” with their return package. Even if the return package didn't include an access code, it's possible to get one (assuming that your tax situation qualifies) by calling the CRA's e-service Help Desk toll-free at 1-800-714-7257. Actually, using TELEFILE is quite straightforward, as the user is guided by a series of voice prompts and has the opportunity, at each step, to verify information entered or, if necessary, to correct it. The CRA's Web site also contains information on how to use TELEFILE, as well as the dates and hours when the service is available. This can all be found at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/tlfl/bt-eng.html.

Taxpayers who are able and willing to prepare their returns using computer software can take advantage of the CRA's NETFILE option. Each year, the Agency certifies or approves specific commercial software packages or Web applications which may then be purchased by the taxpayer and used to file a return through the CRA's Web site. As might be expected, there are encryption requirements which must be met to ensure the security of the data. The CRA's Web site contains a listing of browsers which meet those requirements, as well as a link to a listing of approved software and Web applications for the filing of 2010 returns, at http://www.netfile.gc.ca/menu-eng.html.

Both TELEFILE and NETFILE became available for the filing of 2010 tax returns as of February 14, 2011, and will continue to be available until September 30, 2011.

Finally, taxpayers who prefer to simply let someone else handle the entire tax filing process usually turn to E-FILE. E-FILERS are businesses (usually accountants or accounting firms or companies or individuals whose business is comprised solely of tax return preparation and filing) who are authorized by the CRA to electronically file tax returns for clients. Information about e-filing, and a link to a listing of authorized e-file services providers (organized by postal code), can be found on the CRA's Web site at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/fl-nd/menu-eng.html.

No matter which filing method is chosen, it's important to make sure that any tax owed is paid by the May 2 deadline. If that deadline is missed, the interest clock starts running on May 3. And, although current interest rates are low by historical standards, taxpayers are often surprised to find that interest rates charged by the CRA are, by law, well in excess of current commercial rates. Currently (until March 31, 2011), the CRA charges interest on overdue or insufficient tax payments at a rate of 5%. And, by law, those interest charges are compounded daily, meaning that on each successive day after May 3, interest is charged on the interest levied the day before.

While no one likes paying taxes, or dealing with the administrative burden of filing a tax return, it's an annual chore that must be done eventually. Especially in light of the interest and penalty amounts which may be charged, putting it off just doesn't make sense.

It's that time of year again, when advertisements about the wisdom of contributing to your RRSP (and usually about the benefits of borrowing to do so) fills the airwaves and Web sites. And, since the introduction of tax-free savings accounts in 2009, February is now also the month in which Canadians wrestle with the question of whether to put any available funds into an RRSP before the contribution deadline of March 1, 2011, or whether to deposit those funds instead into a TFSA.

It is important to be clear, at the outset, that it is not an either/or choice. Taxpayers can (and probably should) utilize both the RRSP and TFSA options in planning their financial affairs. Realistically, however, for most taxpayers the limitation is one of resources and cash flow, and it is often not possible to fund contributions to both an RRSP and a TFSA in the same year, let alone in the same month. That said, what are the considerations that apply in determining which savings/investment vehicle is preferable for 2011?

There are some similarities between TFSAs and RRSPs. Both allow savings to grow and compound free of current tax and for both, contributions not made in a year can be carried forward and made in any subsequent year. As well, the types of investments which can be made with RRSP or TFSA contributions are, for all intents and purposes, the same, meaning that one's choice of investment (i.e., GICs, mutual funds, bonds, etc.) should be irrelevant to the choice of RRSP vs. TFSA. However, the differences between the two savings vehicles are at least as significant as their similarities.

Perhaps most important to taxpayers, contributions made to an RRSP are deductible from income, resulting in a lower tax bill for the year of contribution and, for many taxpayers, a tax refund. Contributions to a TFSA are, on the other hand, made with after-tax funds, meaning that tax will already have been paid on the income used to make that contribution. Many taxpayers, when presented with an option that will reduce current year taxes, find that to be the most attractive choice. However, over the long-term, the tax consequences of choosing an RRSP over a TFSA can erode that benefit. When funds contributed (along with investment income earned on those funds) are withdrawn from a TFSA or an RRSP, the tax consequences are very different. Funds withdrawn from an RRSP (or a RRIF into which the RRSP has been converted) are fully taxable, without exception, at whatever tax rate applies to the taxpayer at the time of withdrawal. TFSA funds (including accumulated investment income) are withdrawn from the plan free of tax, regardless of when the withdrawal is made or the purpose to which the funds are put.  And, for taxpayers who are receiving Old Age Security benefits (or any other means-tested benefits) from the federal government, it's important to note that RRSP or RRIF funds withdrawn will be included in income for the purpose of determining eligibility for such benefits, while TFSA funds will not. Finally, while RRSP contributions for 2010 must be made by March 1, 2011, there is no similar deadline for TFSA contributions—they can be made at any time during the calendar year. Finally, when funds are withdrawn from a TFSA, the planholder can “top-up” the TFSA in any subsequent year by the amount of that withdrawal. Funds withdrawn from an RRSP cannot be re-contributed, unless the withdrawal was made as part of government-sanctioned withdrawal plans like the Home Buyers' Plan or the Lifelong Learning Plan.

The minority of working taxpayers who are members of registered pension plans will likely find the TFSA option particularly attractive. The maximum amount which can be contributed to an RRSP for the 2010 tax year is calculated as 18% of earned income for 2009, to a maximum contribution of $22,000. However, that maximum contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under the pension plan. Where the RPP is a particularly generous one, RRSP contribution room may be minimal, making a TFSA contribution the logical alternative.

In a similar way, for taxpayers over the age of 71, the RRSP v. TFSA question is simply irrelevant. Taxpayers over that age are not eligible to make contributions to an RRSP, making TFSAs the only tax-free savings vehicle to which they can make contributions. The benefit is greatest for older taxpayers whose required RRIF withdrawals are greater than their current needs. While such RRIF withdrawals must be included in income and taxed in the year of withdrawal, transferring the funds to a TFSA will allow them to continue compounding free of tax, and no additional tax will be payable when and if the funds are withdrawn. And, unlike RRIF or RRSP withdrawals, monies withdrawn from a TFSA will not affect the planholder's eligibility for Old Age Security benefits or for the federal age credit.

For younger taxpayers, where the savings goal is short-term—for example, a down payment on a home or paying for next year's vacation, the TFSA is clearly the better choice. While choosing to save through an RRSP will provide a deduction on that year's return and probably a tax refund, tax will still have to be paid when the funds are withdrawn from the RRSP a year or two later. And, more significantly from a long-term point of view, using an RRSP in this way will eventually erode one's ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. While the amounts involved may seem small, the loss of compounding on even a small amount over 25 or 30 years can make a significant dent in one's ability to save for retirement.

Taxpayers who are expecting their income to rise significantly within a few years—for example, students in post-secondary or professional education or training programs—can save some tax by contributing to a TFSA while they are in school and their income (and therefore their tax rate) is low, and then withdrawing the funds tax-free once they are working, when their tax rate will be higher. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income that would be taxed at the much higher rate, generating a tax savings. And, if a need for the funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

Financial planners and tax advisers are accustomed to being asked by clients at this time of year whether it makes more sense to pay down the mortgage (or other debt) or to contribute to an RRSP. That question has become more complicated now that the TFSA option has been added to the mix. There is, however, a solution which allows you to do both. Assuming a marginal tax rate of 45%, an RRSP contribution of $11,000 will generate a tax refund of $4,950. Contribute that $11,000 (or as much as you can) to your RRSP and, when the resulting tax refund lands in your bank account, move it to a TFSA or use it to pay down the mortgage or other debt, or split it between the two.

The Canada Revenue Agency has created a section of its Web site to deal with the need for information and taxpayers' questions about TFSAs, and that information can be found at http://www.cra-arc.gc.ca/tx/tfsa-celi/menu-eng.html.

At this time of year, most taxpayers are focused on their tax obligations for the taxation year just ended on December 31, 2010—on the need to file a return for that year, on whether they will be able to come up with an RRSP contribution by March 1, the possibility that there will be taxes owed on filing (or perhaps a refund!), and if there are taxes owing, how to come up with the funds needed to pay that tax bill.

While all of those concerns are valid and pressing ones, the start of a new year is also a good time to start thinking about how to minimize the taxes that will be payable for the current year. While many tax planning strategies can be implemented at any time during the tax year, addressing tax issues at the start of the year can avoid the last minute scramble to verify expenses, locate receipts, and pull together funds for an RRSP contribution with the year-end or even the tax filing deadline for the year looming.

Many taxpayers sit down to prepare their tax returns with the hope that, at the end of the filing process, a tax refund will be forthcoming. The perception persists that a tax refund is a kind of “gift” from the federal government or that it represents “found money” which can only be obtained by filing a tax return. The reality is, in fact, the complete opposite. A tax refund is just that—the return by the federal government of taxes which have been overpaid by the taxpayer during the course of the year. And, in most cases, there is no interest paid by the federal government on that overpayment. Very few taxpayers would, if asked, willingly overpay their taxes and wait for a year, without receiving interest, to get that overpayment back. But every year, millions of taxpayers who collect a refund on filing have done just that.

Consequently, the first step in current year tax planning is to make sure that taxes aren't being overpaid. The majority of working Canadians earn income from employment and, as required by law, the employer deducts income tax from the employee's pay and remits it on the employee's behalf to the federal government. The amount deducted is based on an estimate of the employee's income tax liability for the year; the starting point for determining that liability is the TD1 form for the year. All employees, when they start a new job, must complete a TD1 (actually two TD1s, one for federal purposes and the other for the taxpayer's province or territory of residence). On that form the taxpayer specifies the personal tax credits for which he or she is eligible. Everyone gets the basic personal credit, but the taxpayer must specify which other credits (spousal or equivalent to spouse credit, tuition and education amounts, caregiver credit) he or she will be able to claim in order for the deductions made for income tax purposes to reflect those claims. Often, once an employee has completed the TD1 forms when starting employment, the assumption is made that his or her tax situation has not changed since then, and the deductions made from the employee's paycheque don't change either. However, change comes to everyone's life—a child is born or an older child goes off to university and tuition fees must be paid or an elderly parent can no longer live independently and moves in with an adult child. In some cases, the taxpayer or a spouse must cut back on work hours or even leave work to provide care for that parent. Each of these events, and many others, have tax consequences which will affect the amount of tax payable.  A taxpayer who hasn't filled out a TD1 for a few years, or whose personal circumstances have changed, should review the TD1 form (the federal form is available on the Canada Revenue Agency (CRA) Web site at http://www.cra-arc.gc.ca/E/pbg/tf/td1/td1-11e.pdf) to make sure that the form on file with the taxpayer's employer accurately reflects the taxpayer's current circumstances.

While the TD1 form captures most of the non-refundable tax credits for which an individual taxpayer might be eligible, it does not and cannot reflect the various deductible expenses that a taxpayer might incur over the course of the tax year. At this time of year the deduction which is most on everyone's mind is, of course, the RRSP contribution. Human nature being what it is, most Canadians don't think about RRSPs until the contribution deadline of March 1st is near, and most then have difficulty coming up with the funds to make a contribution on such short notice. Financial advisors continually remind Canadians that it is better, for several reasons, to contribute to one's RRSP throughout the year, rather than waiting until the last minute to do so. What most taxpayers don't realize is that it is possible to get an “assist” from our tax system to do so.

That “assist” comes from taking advantage of an administrative policy of the Canada Revenue Agency, using a form (the T1213) entitled Request to Reduce Tax Deductions at Source, available on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1213/t1213-10e.pdf. Essentially, a taxpayer who will be incurring costs during the tax year that are deductible in the computation of taxable income for that year but which do not appear on the TD1 can apply, using Form T1213, to have the amount of income tax deducted from his or her paycheque reduced to take account of those costs. The biggest and most well-known of those deductions is an RRSP contribution, but it's not the only one. Taxpayers who incur child care expenses, make deductible support payments, make charitable donations, or have deductible employment expenses and can document the payment and amount of those costs can ask the CRA to authorize a reduction in the income tax deductions made from the taxpayer's gross income to reflect those costs.

The resulting increase in take-home pay can be significant. A middle-income taxpayer—one earning around $50,000 per year—will have source deductions reduced (and therefore take-home income increased) by about one-third of the amount of the deduction claimed. Where the taxpayer's income is over $80,000, that decrease in source deductions can rise to just under 40% of the amount of the expense claimed. And for a taxpayer in the highest income tax bracket (more than about $125,000), the percentage is about 45%.

Take, for example, the taxpayer in that highest income earning bracket who wants to make an RRSP contribution of $10,000. To do so, a monthly contribution of $833 throughout the year would be needed. If, however, income tax deductions at source were reduced to take account of that RRSP contribution, the taxpayer's “take-home” income would increase by $375 per month, or nearly half of the amount needed to make that monthly RRSP contribution.

Finally, many taxpayers incur expenses throughout the year for which a tax credit can be claimed on the return—public transit costs, for instance, interest payments on government student loans, or medical expenses. Whatever the expense, it is up to the taxpayer to prove that the expenditure was made and to document the amount that was paid. In many cases, the taxpayer must forgo making any claim because the receipts needed to prove that claim weren't kept or can't be found at tax filing time. It is not necessary to maintain a sophisticated filing system for such paperwork—just keeping all receipts in one place, to be sorted and organized at tax filing time, is all that is needed.

Tax planning is often thought of as a complex and time consuming process, available only to wealthy and sophisticated taxpayers. But the fact is also that a great deal of tax “planning” can be accomplished with only some straightforward paperwork and basic organization, strategies that are available to anyone who is willing to invest a little upfront time and effort.