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Suspension of review, audit and collection activities

The Canada Revenue Agency regularly carries out review activities in which taxpayers are asked to provide documentation or other information with respect to their entitlement to claimed benefits or credits.

The CRA has indicated that taxpayers who have received a letter that includes a date to respond or asks for documents do not need to respond at this time. Verification work is currently on hold and the CRA will re-contact taxpayers at a future date.

The Agency has also announced that it will generally not contact small or medium (SME) businesses to initiate any post assessment GST/HST or income tax audits during the month of April.

Finally, collection activities on new tax debts are suspended until further notice.

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Wage subsidy program for employers

The federal government will be providing eligible employers who have experienced a significant decline in revenues with a wage subsidy. For purposes of the subsidy, eligible employers include individuals, taxable corporations, and partnerships consisting of eligible employers, as well as non‑profit organizations and registered charities.

The subsidy amount for a given employee on eligible remuneration paid between March 15 and June 6, 2020 would be the greater of:

• 75 per cent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
• the amount of remuneration paid, up to a maximum benefit of $847 per week or 75 per cent of the employee’s pre-crisis weekly remuneration, whichever is less.

Details of the wage subsidy program, and how it will be administered, are still being developed and the most up-to-date information can be found on the Finance Canada website at https://www.canada.ca/en/department-finance/news/2020/04/the-canada-emergency-wage-subsidy.html.

Deferral of GST/HST remittance deadlines

Businesses which are required to make GST/HST payments or remittances which become owing on or after March 27, 2020 and before June 2020 can defer payment of those amounts.

The deferral will apply to GST/HST remittances for the February, March and April 2020 reporting periods for monthly filers; the January 1, 2020 through March 31, 2020 reporting period for quarterly filers; and for annual filers, the amounts collected and owing for their previous fiscal year and instalments of GST/HST in respect of the filer’s current fiscal year.

Where such remittances are made on or before June 30, 2020, no interest or penalties will be imposed by the Canada Revenue Agency, regardless of the original due date.

Deferral of income tax filing and payment due dates for corporations

Corporations which have a tax filing due date after March 18, 2020 and before June 1, 2020 will have until June 1, 2020 to effect that filing.

In addition, where any income tax balance or instalment payment of income tax is payable after March 18 and before September 1, 2020, the deadline for making such payment is now September 1, 2020.

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Changes to filing and payment deadlines for 2019 returns

Individual Canadians are generally required to file their tax returns for the 2019 tax year on or before April 30, 2020. Self-employed Canadians (and their spouses) have until June 15, 2020 to file such returns. All individual Canadians, regardless of their filing deadline, must usually pay all taxes owed for 2019 by April 30, 2020.

However, the filing deadline for individuals who would normally have to file by April 30 has been extended to June 1, 2020. The filing deadline for self-employed individuals and their spouses remains June 15, 2020.

The new payment deadline for all individual income tax owed for the 2019 tax year has been extended and is now September 1, 2020. No interest or penalty will be assessed where payment is made on or before September 1.

While individual taxpayers now have until June 1 to file, those who receive Canada Child Benefit or the Goods and Services Tax/Harmonized Sales Tax credit (or similar credits provided by their province of residence) should consider filing as soon as possible. The benefit year for those programs starts on July 1, 2020 and both eligibility for, and the amount of any benefit payable is based on information provided in the 2019 tax return. A delay in the filing of the 2019 return could mean a delay in receiving benefits starting in July 2020. As well, regardless of when they file, taxpayers will have until September 1 to pay any tax balance owed for 2019.

Change to June 15 instalment payment deadline

Many Canadians pay their current year (i.e. 2020) income taxes quarterly, through the income tax instalment system. Such instalment payments of tax are normally made on March 15, June 15, September 15 and December 15.

The federal government has indicated that taxpayers who would normally make an instalment payment of tax on June 15 will instead have until September 1, 2020 to make that payment. No interest or penalties will be assessed where the payment is made on or before September 1.

One-time increase to GST/HST tax credit

The federal government will be providing a one-time increase to the GST/HST tax credit, which is usually paid to qualifying individuals in January, April, July and October of each year.

Those individual Canadians who are eligible for the GST/HST credit will receive a special one-time payment in early May 2020. While precise figures have not been provided, the federal government announcement indicates that the payment will be “close to” $400 per individual and $600 for couples.

Increase to Canada Child Benefit

Eligible Canadian families receive a monthly non-taxable payment of the Canada Child Benefit, with the amount of that payment based on family size and income.

The federal government has announced that, for the 2019-20 benefit year only, the amount of the Canada Child Benefit will be increased by $300 per child. There is no need to make any application, as the increased payment will be added automatically to the regular May 2020 payment, which is scheduled to take place on May 20, 2020.

Change to registered retirement income fund withdrawal requirements

Canadian taxpayers are required to collapse their registered retirement savings plans (RRSPs) by the end of the year in which they turn 71. Most Canadians convert their RRSPs into registered retirement income funds (RRIFs) and they are then required to make annual withdrawals from those RRIFs.

The amount of such annual withdrawal is, by law, a specified percentage (based on the taxpayer’s age) of the balance in the RRIF as of January 1 of the year. There has been a significant decline in the markets since the beginning of this year and, consequently, many RRIF holders will have seen a corresponding decline in the value of their investments.

So that RRIF holders are not penalized by those events (by having to liquidate investments at a loss in order to make a required withdrawal) the federal government has reduced the amount of required withdrawals, for the 2020 taxation year only. Specifically, the minimum withdrawal requirement for RRIFs for 2020 has been reduced by 25%.

It’s important to note, however, that individuals who have already withdrawn more than the reduced 2020 minimum amount will not be permitted to re-contribute to their RRIFs an amount up to the 25% proposed reduction.

Finally, the changes announced also apply to the minimum amount for individuals receiving variable benefit payments under a defined contribution registered pension plan or pooled registered pension plan. Such amounts will also be reduced by 25%, for 2020 only.

Student loan repayments suspended

As of March 30, required repayments of Canada Student Loans will be suspended for a period of 6 months, and no additional interest will accrue on unpaid amounts during that time. There is no requirement that an application be made, as the moratorium on payments during that period will be implemented automatically.

Canada Emergency Response Benefit

Canadians who have no source of income as a consequence of the pandemic may receive $2,000 per month, for a four month period, with that amount provided under under the Canada Emergency Response Benefit (CERB). The CERB is available to a broader group of Canadians than would normally be eligible for income replacement under the Employment Insurance system. Specifically, the CERB applies, in addition to wage earners, to contract workers and self-employed individuals who would not normally qualify for EI.

CERB will be available for Canadians who have lost their job, are sick, quarantined, or taking care of someone who is sick with COVID-19, as well as working parents who must stay home without pay to care for children who are sick or at home because of school and daycare closures. In addition, those who are still employed but are not currently receiving any income from their employer – i.e. are laid off – can qualify.

The specific requirements for an individual to receive CERB, as set out on the federal government website, are as follows:

• Residing in Canada, who are at least 15 years old;
• Who have stopped working because of COVID-19 or are eligible for Employment Insurance regular or sickness benefits:
• Who had income of at least $5,000 in 2019 or in the 12 months prior to the date of their application; and
• Who are or expect to be without employment or self-employment income for at least 14 consecutive days in the initial four-week period. For subsequent benefit periods, they expect to have no employment income.

The federal government has indicated that applications for the CERB can be made online at https://www.canada.ca/en/services/benefits/ei/cerb-application.html as of April 6. As thousands of applications are expected, applicants are asked to apply in the following order:

• on April 6, for those with dates of birth in January, February and March;
• on April 7, for those with dates of birth in April, May and June;
• on April 8, for those with dates of birth in July, August and September;
• on April 9 for those with dates of birth in October, November and December.

Payments will be made within 3-4 days by direct deposit and within10 days if sent by mail.

Detailed information on the CERB, including a list of FAQ, can be found on the federal government website at https://www.canada.ca/en/services/benefits/ei/cerb-application.html?utm_campaign=not-applicable&utm_medium=vanity-url&utm_source=canada-ca_coronavirus-cerb.

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Between now and the end of February 2020, Canadians will receive a variety of receipts for expenditures made during the 2019 taxation year. Some of those expenditure receipts will support a tax deduction or credit claim to be made by the recipient on his or her 2019 tax return, while others will not. And, it’s not always easy for a taxpayer to know when such a credit or deduction is or is not available to be claimed. While the Canadian individual income tax return is only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of capital gains to determining required Canada Pension Plan contributions by self-employed taxpayers.

All of this complexity makes it easy for the majority of individuals who only deal with our tax system once a year to overlook valuable deduction and credit claims which may be available to them. One such deduction is that available for payments made during the taxation year for annual union, professional, or similar dues.

It’s particularly easy to overlook an available claim for that deduction because of where it appears on the annual return. Although there are forms used by self-employed taxpayers to claim business-related costs and forms used by employees to claim allowable employment expenses, the deduction for union or professional dues doesn’t appear on either type of form. Rather, it shows up as a single line (Line 212) on page 3 of the T1 annual return.

The general rule for claiming such a deduction is described in the annual income tax return guide as follows:

Line 212 — Claim the total of the following amounts related to your employment that you paid (or that were paid for you and reported as income) in the year:

• annual dues for membership in a trade union or an association of public servants;
• professional board dues required under provincial or territorial law;
• professional or malpractice liability insurance premiums or professional membership dues required to keep a professional status recognized by law; and
• parity or advisory committee (or similar body) dues required under provincial or territorial law.

There are, of course, limitations on the kinds of expenses which may be claimed and the circumstances in which a taxpayer is entitled to claim those expenses. The most important such restriction is that amounts paid must be those which are necessary in order for the taxpayer to obtain or maintain his or her professional standing. Every profession and trade has licensing and similar requirements which mandate that an individual maintain membership in a professional or similar association in order to practice his or her profession or trade. The costs of maintaining required membership in those organizations is deductible. The cost of maintaining membership in other, voluntary associations, even if related to one’s trade or profession, is not. So, for example, if membership in a given association does not affect professional status (e.g., the Canadian Bar Association for lawyers) dues paid to maintain that membership are not deductible. If, on the other hand, membership (and the payment of fees or dues) is necessary to maintain professional status (e.g., the applicable provincial Law Society for the lawyer) the dues paid to that organization are deductible.

As well, invoices received for annual membership costs can cover a number of different charges and levies, and not all of those costs will be deductible. The policy of the Canada Revenue Agency (CRA) is that annual membership dues do not include initiation fees, licences, special assessments, or charges for anything other than the organization’s ordinary operating costs. A taxpayer cannot claim charges for pension plans as membership dues, even if receipts received show them as dues.

Where a claim for a deduction for professional membership or union dues is made by an employee, some other considerations arise. Generally, while it’s not necessary that having a particular professional designation be a requirement of the employee’s position in order for that employee to claim a deduction for related professional dues, the CRA does require that there be some connection between the employment and the professional association in question.

In some cases, an employer is willing to cover the cost of an employee’s professional dues as part of the employee’s benefit package. Where that’s the case, and the employer’s payment of those dues does not appear on the employee’s T4 as a taxable benefit, no deduction for those costs can be claimed by the employee. Where, however, there is a taxable benefit which accrues to the employee, he or she can claim an offsetting deduction for eligible dues or fees paid, on Line 212 of the return.

General information on the deduction of professional membership fees or union dues, for both self-employed taxpayers and employees can be found on the CRA website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/212/menu-eng.html.

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To win elections, politicians need votes. And to run the election campaigns needed to garner those votes, those politicians need an organization, volunteers, and money — a lot of money. To wage the most recent federal election, the major political parties raised and spent millions of dollars, and their task of raising that money was undoubtedly made somewhat easier by the fact that Canadian taxpayers who donated money to political parties or candidate can obtain some tax relief from doing so.

Individuals who donated to the political party or candidate of their choice may or may not be happy with the outcome of the election, but no matter which registered party or candidate they donated to, it will be possible for them to claim a federal tax credit for those donations when they file their returns for 2019 next spring.

The credit provided under the Income Tax Act is available with respect to funds contributed to either a registered political party or to candidates running in a federal election. Contributions can be made at any time, not just during an election campaign, as long as the donation is received by an official candidate or a registered federal political party or association.

While the parties which currently hold seats in the House of Commons are, of course, the most well-known, there were in fact 21 political parties registered and in good standing with Elections Canada for purposes of the 2019 federal election. They are as follows, in alphabetical order:

• Animal Protection Party of Canada
• Bloc Québécois
• Canada’s Fourth Front
• Canadian Nationalist Party
• Christian Heritage Party of Canada
• Communist Party of Canada
• Conservative Party of Canada
• Green Party of Canada
• Liberal Party of Canada
• Libertarian Party of Canada
• Marijuana Party
• Marxist-Leninist Party of Canada
• National Citizens Alliance of Canada
• New Democratic Party
• Parti pour l’Indépendance du Québec
• Parti Rhinocéros Party
• People’s Party of Canada
• Progressive Canadian Party
• Stop Climate Change
• The United Party of Canada
• Veterans Coalition Party of Canada

Donations to any one of these registered parties, within prescribed limits, would qualify for the federal political contribution tax credit.

Official candidates can, of course, be running either as candidates for one of the registered parties or as independents. Elections Canada provides a list of confirmed candidates who ran in this year’s federal election, and that list can be found at https://www.elections.ca/content2.aspx?section=can&document=index&lang=e.

The federal political tax credit is calculated as a percentage of donations given. However, the credit percentage decreases as contributions amounts increase, and no credit at all is given for donations in excess of $1,275. The credit percentages allowed at different contribution levels are as follows:

The maximum credit claimable in any taxation year by a single taxpayer is $650. Once the math is worked out, it becomes clear that the maximum credit obtainable is reached once contribution levels reach $1,275.

Contribution amount       Allowable tax credit

$400 × 75% =                               $300

$350 × 50% =                               $175

$525 × 33.3% =                            $175  

$1,275                                           $650

Where donations exceed $1,275 in any one taxation year, no tax credit can be claimed on the “excess” donation. As well, there is no provision which allows the taxpayer to carry over any “excess” contributions to a subsequent taxation year, meaning that no credit will ever be obtainable with respect to those “excess” contributions.

Many Canadians who are committed to a particular political party or candidate volunteer their time during a nomination or election campaign – canvassing for the candidate, putting up election signs or telephoning voters to encourage them to vote for the candidate. However, in such cases, the work must be its own reward, as no income tax receipts can be issued for most such non-monetary contributions and consequently no credit can be claimed for the value of any non-monetary contribution (including volunteer hours) donated.

Where a qualifying contribution is made, an official receipt must be issued in order for the tax credit to be claimed. During an election campaign, the official agent of a candidate issues that receipt, and it must be issued between the time the candidate is officially nominated and election day. Outside an election period, any receipts are issued by the registered agent of a political party or association. A receipt must be issued, in paper or electronic format, for every contribution over $20.

The actual credit for qualifying donations made is claimed on the tax return for the year in which the contribution was made. The amount of the credit is calculated (according to the formula outlined above) on the Federal Worksheet and the amount of the actual credit entered on line 410 of Schedule 1 of the federal tax return. By the time the 2019 return is filed, of course, the election will long since have been concluded, the newly elected government will be in place in Ottawa, and the taxpayer will be in a position to assess whether it was, in fact, money well spent.

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When parents separate and divorce, it is frequently the case that they are able to agree on an arrangement to share custody of their children. Such a shared-custody arrangement is often to the benefit of all concerned, especially the children of the marriage.

While a shared-custody arrangement usually makes the most sense from a human perspective, it can cause legal, financial, and tax complications. In particular, parents who share custody of their children must usually share, or divide, the tax deductions and benefits which can be received in respect of those children.

One of those benefits is the Canada Child Benefit (CCB) which is, in general terms, a non-taxable monthly benefit paid to parents of children who are under the age of 18.

The tax rules allow parents who share custody to also share CCB amounts. In such situations, payments made are equivalent to each eligible individual receiving one-half of the annual entitlement that they would receive if they were the only eligible parent (i.e., if the child lived with them all of the time), paid in monthly installments over the year. That has been the case since 2011, with the Canada Revenue Agency (CRA) determining who qualifies, based on an interpretation of shared parenting as meaning that a child generally lives with the parent between 40% and 60% of the time. However, recent Court decisions have altered and narrowed that policy, finding that a shared parenting arrangement requires that a child reside with a parent between 45% and 55% of the time.

In the CRA’s view, the narrower interpretation put forward into those Court decisions could result in a number of parents who share parenting time not being able to share in the benefits to which they are entitled. Consequently, new rules have been published to clarify the payment of CCB to shared-custody parents.

Those new rules provide that a shared-custody parent would be defined as one of two parents who:

• are not at that time cohabitating spouses or common-law partners of each other;
• reside with the child either at least 40% of the time in a month or on an equal or approximately equal basis; and
• primarily fulfill the responsibility for the care and upbringing of the child when residing with the child.

The proposed changes will provide more flexibility when it comes to shared-custody parents and the receipt of tax benefits for their children and will allow the CRA to continue with its existing administrative practices with respect to such parents. While the legislation to make the announced changes has not, owing to the election call, been passed by Parliament, officials of the Department of Finance have indicated that the CRA will nonetheless be administering the CCB based on those proposed rules, which are retroactive to June 2011.

More information on the new rules can be found on the Finance Canada website at https://www.fin.gc.ca/n19/data/19-095_01-eng.asp.

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By now, news of yet another data breach resulting in unauthorized access to personal information — especially financial information — has become so frequent as to seem almost commonplace. Notwithstanding, the recent data breach affecting Capital One was, in many ways, a singular event.

The magnitude of the Capital One data breach was unprecedented in many respects. The number of Canadians affected by the breach, the volume of information obtained and, particularly, the nature of the information lost were all on a scale not previously seen, in Canada or elsewhere.

According to information provided by Capital One, approximately 6 million Canadians (or one in every six Canadians) have had the privacy of their personal information compromised. Part of the reason that such a huge number of individuals has been affected is the time frame involved. The breach affected, not just those who held credit products issued by Capital One, but those who applied for such products (whether or not they were ever obtained) for a fifteen-year period, from 2005 through early 2019. The personal information obtained through the breach included personal information Capital One routinely collects at the time it receives credit card applications, including names, addresses, postal codes, phone numbers, email addresses, dates of birth, income, credit scores, credit limits, balances, payment history and contact information.

While a privacy breach involving any of the above information is problematic for those affected, the most significant aspect of the Capital Once breach is that the Social Insurance Numbers (SIN) of 1 million Canadians were obtained by an unauthorized person or persons as a result of the privacy breach. A SIN is the “gold standard” of personal identification for Canadians — it is used to file tax returns, obtain government benefits, and open bank accounts. Having someone’s SIN makes it easier to obtain other identifying information and that information, in the aggregate, facilitates identity theft.

Anyone who has been the victim of a personal information data breach can take steps to mitigate the possible impact of that breach. Affected credit cards can be cancelled and re-issued and bank account numbers changed. Individuals can change passwords and e-mail addresses. While all of that is time consuming, aggravating and inconvenient, it can be done.

The situation is different when it comes to SINs. SINs are issued by the federal government and the government’s policy is to NOT provide an individual with a new SIN where the original number is compromised in a data breach. (A new SIN can be requested only in circumstances in which an individual can prove that his or her SIN was used fraudulently.) The stated reasons for that policy, as outlined on the Service Canada website, are as follows:

A new Social Insurance Number does not protect you from fraud and identity theft

A new SIN is not a fresh start or protection from fraud or identity theft.

If someone else uses your old SIN and the business does not check the person’s identity, you may have to prove you were not involved in the fraud or pay the impostor’s debts.

A new Social Insurance Number is a complex affair

The Government can only share your new SIN with the federal departments and agencies that use your SIN.

This means that it would be up to you to provide your new SIN to all the financial institutions, creditors, pension providers, recent and current employers, and any other organizations with which you shared your old SIN.

Not doing so or failing to do so properly risks not receiving benefits or leaves the door open to subsequent fraud or identity theft.

You double your monitoring efforts with two Social Insurance Numbers instead of one

A new SIN does not erase your old SIN. You would therefore need to monitor your accounts and credit reports for both SINs on a regular and ongoing basis. This would put added burden on you. Numerous SINs multiply the risk of fraud.

Consequently, individuals whose SINs have been obtained by unauthorized persons through the Capital One hack will need to be vigilant, now and for some time into the future, to guard against unauthorized use of that number. Such individuals may rightfully expect Capital One to take responsibility for and cover the cost of such monitoring efforts, and the company has indicated that it will take the following actions.

The company began directly notifying Canadians affected by the cyber incident by email on August 7, 2019, and that process will continue by e-mail or regular mail, over several weeks. The difficulty, of course, is that e-mail addresses were one of the kinds of information obtained as part of the data breach. Consequently, anyone who receives an e-mail from Capital One will need to take steps to ensure that such e-mail is not part of a further phishing attempt. Any suspicious e-mails received should be forwarded, without opening (and especially without clicking on any links) to abuse@capitalone.com In order to help those affected spot fraudulent emails or messages, Capital One has posted a number of tips on its website at https://www.capitalone.ca/help/fraud-protection/.

Capital One has also announced that it will not be contacting anyone affected by the data breach by telephone or text. Consequently, any phone call or text which purports to be from Capital One is fraudulent and should be ignored. Where personal information has mistakenly been provided in response to such a call or text, the following steps should be taken:

• call Capital One to report that account information may have been compromised;
• sign in to Capital One online banking and change passwords; and
• check accounts for suspicious activity.

Finally, the company has indicated that it will provide and pay for two years of credit monitoring and identity theft insurance from TransUnion to everyone impacted. Details of the data breach and the company’s response are outlined on the Capital One website at https://www.capitalone.ca/facts2019/.

One of the reasons that so many SINs were compromised in the Capital One data breach is that Canadians have become accustomed to being routinely asked for their SIN in situations in which that request shouldn’t be made. And, in too many cases, Canadians routinely provide those SINs without fully considering the potential risks.

The number of instances in which individuals are required to provide their SINs is actually quite limited, and such information can generally be requested only by an employer, by agencies of the federal government, or by private institutions (like banks or credit unions) which are required to provide taxpayer-specific information to the federal government, especially the tax authorities, and then only in specific circumstances.

Notwithstanding, SINs are requested in any number of situations in which they don’t have to be provided, including the following:

• proving your identity (except for specific government programs);
• completing a job application before you get the job;
• completing an application to rent a property;
• negotiating a lease with a landlord;
• completing a credit card application;
• cashing a cheque;
• completing some banking transactions (mortgage, line of credit, loan);
• completing a medical questionnaire;
• renting a car;
• subscribing to long distance or cellular telephone services;
• writing a will;
• applying to a university or college; and
• making funeral arrangements.

Somewhat surprisingly, it’s not actually against Canadian law for an individual or company to ask for a SIN in circumstances in which they aren’t entitled to it. Consequently, the onus falls on the individual to refuse to provide his or her SIN in such circumstances. That’s not always as easy as it sounds — for instance, SINs are routinely requested in residential tenancy applications and, in a tight rental market, individuals may be reluctant to refuse where doing so could mean losing out on hard-to-find rental accommodation. Individuals will therefore need to determine, in each instance, whether the risks inherent in providing one’s SIN number are justified in the circumstances. And no matter what those circumstances are, the best advice is always this: if you don’t have to disclose identifying and/or personal financial information, then don’t!

The post Protecting your personal information – the Capital One data breach appeared first on EBT.

While having a home which has greatly appreciated in value may provide a sense of security, what it doesn’t provide is an income. Most retired Canadians are eligible to receive Canada Pension Plan and Old Age Security payments and, while those two programs provide the “backbone” of retirement income in Canada, they are almost never enough on their own to provide for a comfortable standard of living in retirement. Most retirees also have private retirement savings, usually through registered retirement savings plans (RRSPs), but once again, the amount saved by many Canadians through RRSPs falls short of what will be needed to generate a reasonable income over their remaining lifetime, especially where a retirement can last for twenty or more years, and when inflation over that time period is taken into account. Many retired Canadians are, in effect, “house rich and cash poor”.

In many cases, those approaching retirement opt to sell their current home – sometimes in order to move to a smaller, easier to maintain dwelling and sometimes simply to free up the capital represented by their accumulated equity. However, while selling and downsizing is the option chose by many retirees, not everyone wants to leave the family home at retirement. There are many situations in which moving and downsizing isn’t desirable or even possible. Especially for those living in smaller centres, where the types of available housing may be limited, downsizing or choosing to rent could mean having to move to another community. Moving and leaving behind friends and other social supports is difficult at any age, and especially difficult when it coincides with a major life change like retirement. As well, it’s increasingly the case that adult children “boomerang” back to the family home after finishing their education. In many cases, such adult children are unable to find long-term employment or remuneration from available employment isn’t sufficient, or sufficiently secure, for them to take on the financial obligations of having their own home, even as a tenant. For a variety reasons, then, it may be that retirees need to stay, or choose to stay, in the current family home. Where that is their choice, and the only factor creating pressure for them to sell that home is the need to free up equity to create or increase cash flow during retirement, there are other options available.

One of those options which is currently receiving a lot of attention is the reverse mortgage. Reverse mortgages are better known, more widely used and have a much longer history in the U.S. than they do in Canada. However, such financial vehicles are now being advertised and promoted on a regular basis in the Canadian media, and it’s likely that by now most Canadians have at least heard of them.

Simply put, taking out a reverse mortgage allows qualifying homeowners to obtain a sum of money based on the value of their home and the equity which they have accumulated in that home without selling that home. It’s also possible, using a reverse mortgage, to structure the receipt of funds in different ways. The homeowner can choose to receive a lump sum amount or can opt to receive a series of payments which will provide a regular income stream, or some combination of the two. And, with a reverse mortgage, no repayment of the funds advanced is required until the homeowner moves out of or sells the home.

When described in those terms, a reverse mortgage can sound like the perfect solution to a cash-strapped retiree. The ability to ease cash flow worries while remaining in one’s own home with no requirement to make any payments at all can sound like the best of all possible worlds. And it’s certainly true that taking out a reverse mortgage can make sense for retirees who are house rich but cash or cash-flow poor. But, as with all financial tools, it’s necessary to understand both the benefits and the potential costs and risks of getting a reverse mortgage.

The potential downsides of a reverse mortgage start with the basic costs of obtaining one. Setting up a reverse mortgage involves a number of costs for the homeowner, including the need to have one’s property appraised. There will also be closing costs, and the homeowner will be required to obtain independent legal advice, and to pay the cost of obtaining such advice.

Once the reverse mortgage is taken out, interest will, of course, be levied on all amounts provided, and will accumulate from the time the funds are first advanced. Total interest costs can add up very quickly and reach significant amounts by the time the debt is eventually to be repaid, usually out of the proceeds from the sale of the house. And, of course, every dollar of funds advanced and interest levied reduces the amount of equity which the homeowner has built up, on a dollar for dollar basis.

In order to obtain a reverse mortgage, the homeowner must be at least 55 years of age. And, where there is already a mortgage or other form of loan secured by the home (as is increasingly the case for retirees), the reverse mortgage lender will require that any such indebtedness first be paid off with the funds received from the reverse mortgage.

The major benefits of a reverse mortgage for many retirees is that amounts received are not subject to tax and do not affect the borrower’s eligibility for means-tested government benefits like Old Age Security or the Guaranteed Income Supplement. And, of course, the homeowner is not required to make payments while living in the home, putting much less of a strain on cash flow. Offsetting that benefit, however, is the fact that the interest rate charged on a reverse mortgage is usually higher than that which would be levied under a traditional mortgage or other similar financial products. As well, under the terms of many such arrangements, a prepayment penalty is levied where the homeowner moves or sells the house within three years of obtaining the reverse mortgage.

Many retirees who obtain a reverse mortgage do so with the thought that the debt will not need to be repaid until after their death, when the house will be sold. However, it’s necessary to consider the possibility that the homeowner/retiree will need to move from his or her home at some point in the future to an assisted living facility. Care in such facilities does not come cheap, and in many cases the retiree must shoulder all or a part of the cost of such care on an out-of-pocket basis. If the retiree is counting on his or her home equity to pay for such care, it’s necessary to consider the extent to which the reverse mortgage will reduce that accumulated home equity and consequently the funds available to pay for needed care.

For those who are considering whether a reverse mortgage is the right solution for them in retirement, Canada’s Financial Consumer Agency suggests getting answers from prospective lenders to the following questions:

What are all the fees?
Are there any penalties if you sell your home within a certain period of time?
If you move or die, how much time will you or your estate have to pay off the loan’s balance?
When you die, what happens if it takes your estate longer than the stated time period to fully repay the loan?
What happens if the amount of the loan ends up being higher than your home’s value when it is time to pay the loan back?
More information on reverse mortgages in general can be found on the FCAC website at https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reverse-mortgages.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The post Accessing home equity in retirement – the reverse mortgage appeared first on EBT.

The reason such Reminders are sent during July has to do with how tax is collected in Canada, and when tax returns are filed. Most Canadians, and certainly all Canadians who are employees, have income taxes deducted (or withheld) from each paycheque and remitted to the federal government on their behalf. They then file a tax return for the year the following spring: if they have overpaid taxes they receive a refund and, where taxes were underpaid, they will have a balance owing.

Where, however, a taxpayer receives income from which no tax has been deducted or withheld, the federal government must have another way of collecting the tax owed on such income amounts. And, while it’s possible that such taxpayers could simply pay the full amount of taxes owed for the year when filing the annual tax return, it’s not likely that many individuals would have the financial wherewithal to do so. And, in addition, the federal government is not prepared to wait until then to receive tax amounts owed for the entire year. Instead the instalment payment system is the means by which the Canada Revenue Agency collects such tax amounts, on a quarterly basis, throughout the year.

More technically, an individual is subject to the instalment payment requirement where his or her tax owed on filing for the current year and either of the two previous years is more than $3,000. In other words, the amount of tax collected from that individual throughout the year was at least $3,000 less than the actual tax owed for that year. And, since Canadian tax returns are filed in the spring, the assessment of those returns allows the Canada Revenue Agency to identify individuals who will be subject to the instalment requirement for the current year – and it is those individuals who receive an instalment reminder this month.

Regardless of the type or amount of his or her income for the year, or the amount of any instalment payments, the options available to the recipient of an Instalment Reminder are the same. On its website, the CRA describes the three different payment options open to taxpayers, and outlines the benefits and risks of each option in different circumstances, as follows:

No-calculation option
This option is best for you if your income, deductions, and credits stay about the same from year to year.

We will give the no-calculation option amount on the instalment reminders that we will send you. We determine the amount of your instalment payments based on the information in your latest assessed tax return.

Prior-year option
This option is best for you if your 2019 income, deductions, and credits will be similar to your 2018 amount but significantly different from those in 2017.

You determine the amount of your instalment payments based on the information from your tax return for the 2018 tax year. Use the Calculation chart for instalment payments for 2019 to help you calculate your total instalment amount due.

If you use the prior-year option and make the payments in full by their 2019 due dates, we will not charge instalment interest or a penalty unless the total instalment amount due you have calculated is too low. For more information, see Instalment interest and penalty charges.

Current-year option
This option is best for you if your 2019 income, deductions, and credits will be significantly different from those in 2018 and 2017.

You determine the amount of your instalment payments based on your estimated current-year (2019) net tax owing, any CPP contributions payable, and any voluntary EI premiums. Use the Calculation chart for instalment payments for 2019 to help you calculate your total instalment amount due.

If you use the current-year option and make the payments in full by their 2019 due dates, we will not charge instalment interest or a penalty unless the amounts you estimated when calculating your total instalment amount due were too low. For more information, see Instalment interest and penalty charges.”

Under any of these options, the dates for payment and the percentage amounts payable are summarized as follows:

No-calculation option – Pay the amount shown in box 2 of the Instalment Reminder for September 15 and December 15.

Prior-year option – Determine net taxes owed for 2018. Pay 75% of the total on September 15 and 25% on December 15.

Current-year option – Estimate current-year 2019 net tax owing. Pay 75% of the total on September 15 and 25% on December 15.

The first option – paying the amounts identified on the Instalment Reminder by the September and December deadlines – is the easiest and simplest choice. If the amounts paid represent an overpayment of taxes for 2019, the taxpayer will receive a refund of that overpayment on filing in the spring of 2020. If the amounts identified turn out be an underpayment of tax (in that they are insufficient to cover total tax owed for the year), the taxpayer will have a balance owing on filing. In no case, however, will the taxpayer be charged any interest on insufficient instalment payments.

Taxpayers who don’t wish to pay the amounts specified in the Instalment Reminder (perhaps because they believe that such amounts don’t accurately reflect their tax payable for the year) can use options 2 or 3. The only risk to doing so is that, should the instalments paid be insufficient to cover tax liability for the year, interest will be levied on the underpayments.

More details on the options available to taxpayers who receive an Instalment Reminder, and information on the instalment payment system generally, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments.html.

No one particularly likes receiving an Instalment Reminder and everyone dislikes paying taxes. It’s worth remembering, however, that the payment of income tax isn’t a choice – the only real choice is whether to pay now, or pay later. And, for most Canadians, paying taxes on a regular basis throughout the year is much more manageable than being faced with a huge tax bill when filing their return for 2019 next spring.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

The post Getting a first instalment reminder from the Canada Revenue Agency appeared first on EBT.