Year: 2022

OLD AGE SECURITY (OAS): Clawback Planning

Posted on by Edixon

Individuals who normally receive OAS are occasionally surprised when some OAS is subject to a special tax (commonly referred to as a “clawback”) with their T1 tax filings due to high earnings. In particular, OAS is clawed back at a rate of 15% of adjusted income (AI) received in that year over an indexed threshold amount.

The current and upcoming threshold amounts are $79,845 (2021) and $81,761 (2022). If receiving maximum OAS in 2021 (assuming no changes for items like deferred application, being over age 75, etc.), the full amount will be clawed back if 2021 AI is $129,757 or higher.

AI is net income before the deduction of any clawback with a few modifications, such as removal of Registered Disability Savings Plan (RDSP) income inclusions.

OAS payments starting in July are subject to withholdings based on AI of the prior calendar year. If it is known that AI for the current year will be less than that of the prior year, Form T1213(OAS) can be filed to request reduced withholdings.

Some planning considerations

Defer commencement of OAS receipt Future OAS payment increases of .6% per month of delay (to a maximum of 36% for 5 years of deferral) are provided to compensate for the deferral of OAS pension payments. This flexibility may permit a person to reduce or eliminate the OAS clawback by deferring the receipt of OAS until the income of the person is below the AI clawback threshold. If OAS will be clawed back in its entirety, it costs noting to delay but provides the benefit of increased future payments. Increased OAS payments also increase the AI level at which all OAS is clawed back.

A further possibility for a high-income individual is to retroactively apply early in a year after reaching age 65 to receive up to additional 11 months of benefits in a single calendar year, hopefully retaining some benefits in that one year. For high-income seniors, application could be delayed resulting in the full 36% enhancement and 23 payments received in the year the individual reaches age 72.

Use resources that reduce AI

It is important to know how certain sources of income affect AI as any changes between the beginning clawback threshold and the amount at which OAS is completely eroded carry a 15% impact on OAS entitlement. Note that 115% of ineligible dividends and 138% of eligible dividends are included in AI. On the other hand, only 50% of capital gains are included.

Watch out for deductions

From an overall perspective, it may even be beneficial to shift pension income to the higher-earning spouse if it reduces clawback for the lower earner, despite the increase in marginal tax rates.

Certain deductions such as non-capital and net capital losses, the capital gains deduction, and the northern residence deduction will not reduce clawback. As such, for example, while no tax may need to be paid on the sale of qualified small business shares or qualified farm property, OAS could still be significantly impacted. On the other hand, deductions for pension splitting, which are discretionary, do reduce AI.

Time income inclusions

If an individual’s AI will unavoidably already fully eliminate OAS, consider whether additional amounts that have high impacts on AI could be taken into income in the current year, with the after-tax amounts to be used to fund needs in future years. Likewise, if far below the prescribed threshold, the same may be considered as additional amounts do not erode OAS until that threshold is reached. Of course, the advantages would have to be balanced against any differences in applicable marginal tax rates and other income-tested benefits.

Individuals should also consider whether funds needed for the year could be obtained from sources that do not impact AI at all, such as capital dividends, capital withdrawals from investments, trust distributions of capital, TFSA withdrawals, repayment of shareholder loans, or obtaining new loans.

ACTION ITEM: Care should be taken to minimize the current year and future year clawbacks to Old Age Security payments.

SMALL BUSINESS AIR QUALITY IMPROVEMENT TAX CREDIT: Could Your Business Benefit?

Posted on by Edixon

The December 14, 2021, Economic and Fiscal Update proposed a temporary refundable small businesses air quality improvement tax credit of 25% on eligible air quality improvement expenses incurred by small businesses to make ventilation and air filtration systems safer and healthier.

The credit will be available for qualifying expenditures between September 1, 2021, and December 31, 2022, related to the purchase or upgrade of mechanical heating, ventilation and air conditioning (HVAC) systems, and the purchase of standalone devices designed to filter air using high-efficiency particulate air (HEPA) filters, up to a maximum of $10,000 per location. There is also a $50,000 maximum claim to be shared among all affiliated entities. The $10,000 and $50,000 limits apply to expenditures over all years (since the beginning of the program) rather than to each particular taxation year.

Eligible entity

The credit is available to qualifying corporations, partnerships, and individuals other than trusts. A qualifying corporation is a Canadian-controlled private corporation (CCPC) that has (in combination with associated corporations) less than $15 million in taxable capital employed in Canada.

Qualifying expenditures

To qualify, expenditures must be made for a qualifying location in Canada used by the entity in its ordinary commercial activities.

Claiming the credit

Expenses incurred September 1 – December 31, 2021, are claimed in the entity’s first tax year that ends on or after January 1, 2022, while expenses incurred January 1 – December 31, 2022, are claimed in the tax year in which the expenditure was incurred.

The credits are taxable in the taxation year in which they are claimed.

ACTION ITEM: Please maintain and provide us with any receipts for amounts expended that may benefit from this tax credit.

CORPORATE ADVERTISING AND PROMOTION EXPENSES: CRA Increasing Reviews

Posted on by Edixon

Over the past few years, CRA has taken a targeted approach in reviewing amounts claimed under specific lines (based on the type of claim) of a corporate tax return. Various projects conducted included reviews of professional fees, travel expenses, and the purchase of certain vehicles.

CRA has recently focused their efforts on advertising and promotion expenses claimed by corporations. As part of this most recent project, CRA is asking for the following:

  • a detailed list of the transactions (or the general ledger entries) related to the expenses; and
  • a copy of the invoices and receipts for the ten largest transactions included in the expenses.

While there are many reasons to obtain this type of information, CRA may be analyzing whether any amounts deducted were personal, not wholly or partially deductible, or should have been capitalized. For example, provided no exceptions are available, amounts paid for food, beverages, or entertainment are only 50% deductible to the corporation. Also, green fees for golf and membership fees in a golf club are not deductible regardless of whether they are incurred for business purposes.

ACTION ITEM: Be aware that additional CRA activity in these areas could result in extra time and administrative costs.

Creating a Respectful (And Compliant!) Workplace

Posted on by Edixon

Few people would disagree that every workplace should be free from violence and harassment of any kind. Everyone should be able to work in a safe and healthy work environment. The Occupational Health and Safety Act (OHSA) has set out the roles and responsibilities of employers with respect to Workplace Violence and Harassment and it is important to note that the fallout to an organization can be significant when violence or harassment concerns are not addressed.

Since 2010 and 2016, Bill 168 (violence and harassment) and Bill 132 (sexual harassment) within the OHSA have been in place to help guide employers and protect employees.

There’s never a bad time for some reminders on what these important pieces of legislation entail! Although you are likely familiar with Bills 168 and 132, as you start off your year and are thinking about your HR strategy, you will want to consider whether you are meeting your compliance obligations.

Did you know?
  • Employers are required to work with their Health and Safety Committee or Representative to develop and implement a Workplace Violence and Harassment program. This program includes your policy and employee training.
  • Your policy must be reviewed at least once a year and must express the employer’s commitment to addressing Workplace Violence and Harassment.
  • Your policy must clearly express that the employer will conduct an investigation of harassment complaints without penalizing those who report harassment.
  • You must ensure that employees complete Workplace Violence and Harassment training (we recommend doing this during the onboarding process).
  • Risk assessments should be frequently conducted by employers and all training components must be updated to reflect any policy changes.
  • It is recommended, and the Ministry of Labour can compel, that employers hire a third-party investigator to investigate and produce a report on a complaint of workplace harassment.
Why is this important to you?
  • It is the law; organizations of all shapes and sizes are legally required to comply – no one is exempt! Although organizations with under 5 employees do not require a formal policy, they are still required to comply with every other component of the legislation.
  • Failure to comply with this legislation may result in costly fines to a maximum of $500,000 for corporations, and up to $25,000 or 12 months imprisonment for individuals.
  • Left unchecked, harassment in the workplace can lead to additional or indirect costs. These can include:
    • Increased absenteeism
    • Decreased productivity
    • Turnover
    • Poor morale and low employee engagement
    • Legal or outsourced costs for litigation claims
How can DJB HR help?

Our team of HR Professionals and Certified Investigators can help to ensure that you are meeting your obligations related to Workplace Violence and Harassment.

Be proactive, not reactive. Building your Workplace Violence and Harassment program does not need to be difficult, but it is important you have something in place.

We can support your organization in the following ways related to Workplace Violence and Harassment:

  • Workplace investigations
  • Policy development
  • Workplace risk assessments
  • Compliance training and education
  • Review of overall legislative compliance

Want to learn more about what you’ve read? Need assistance in getting your Workplace Violence and Harassment program up to speed? Just want to chat about HR?

Contact djbhr@djb.com to connect with one of our HR Professionals to discuss your HR needs.

T5018 Information Return

Posted on by Edixon

One of Canada Revenue Agency’s (CRA) strategies to combat the ever-growing underground economy is to require construction businesses to file an annual T5018 return. A T5018 Statement of Contract Payments Information Return, and slips, are required to be filed by any individual, trust or corporation with construction as their primary business activity (>50% of income earning activities are derived from construction) and have made payments to (or received credits from) subcontractors for construction services in excess of $500 in the year. CRA uses this information to identify subcontractors that do not file returns, report their full income, or are not properly registered for GST/HST.

Filing requirements

If you file more than 50 information slips, you have to file them over the Internet (www.cra.gc.ca/iref). If you file fewer than 50 information slips, you may submit your information return electronically, or in paper format at the address provided on the back of the summary.

Failure to file and penalties

You can choose to do these slips either at your fiscal year-end, or at December 31st each year. Regardless of which reporting period you decide, you have 6 months from that date to file the slips. In order to change the reporting period you have selected, you will need approval from the CRA. If your business stops operating, you must file the information return within 30 days of the day your business ends.

If you fail to file an information return by the due date, a late-filing penalty may be assessed. Each slip is an information return and the penalty is based on the number of slips filed late. The penalty is the greater of $100 or a penalty determined as follows:

Voluntary Disclosure Program

If you have not filed T5018’s in the past but were required to, CRA offers a voluntary disclosure program (VDP) to bring these filings up to date. Under this program, CRA will usually waive any late-filing penalties that would result from filing the returns past their due date. To be eligible for the VDP you must take action before CRA issues a demand to file the overdue return, the information return must be at least one year overdue, and the information being submitted must be complete. It is important to note that you are expected to bring your T5018 filings up to date for all insufficient tax years under a single voluntary disclosure.

For further information, or assistance with filing a T5018 Statement of Contract Payments Information Return, please contact your nearest DJB office.

 

Considerations for Using a Spousal RRSP

Posted on by Edixon

For a number of years the government has given taxpayers the ability to split certain pension income with their spouse when filing their tax returns.  Taxpayers can also contact Service Canada and ask them to split their monthly Canada Pension Plan payments.  As a result, many people wonder if there are still advantages of contributing to a spousal Registered Retirement Savings Plan (RRSP).  Let us look at some reasons why spousal RRSPs still do make sense.

To refresh your memory, spousal RRSPs were originally designed to allow the high-earning individuals to contribute to their spouse’s RRSP but claim the deduction themselves. When it comes time to withdraw the funds from the RRSP, the money will be taxed in the hands of the spouse.  However, there is one key item of note.  The last contribution must remain in the plan for at least two calendar years after the year in which it was deposited.

Here are some reasons a spousal RRSP may make sense for you:

Greater immediate tax savings

Let us assume that the higher earning spouse is in the 50% tax bracket and the lower earning spouse is in the 30% bracket.  If the lower earning spouse contributed $1,000 to their own RRSP, they would only realize tax savings of $300.  Conversely, a spousal RRSP contribution by the higher earning spouse of $1,000 would save $500 in taxes, an increase of $200.

Your goal is to retire before the age of 65

The pensions splitting rules do not allow you to split RRSP income before the age of 65.  Therefore, if you take money out of your RRSP before the age of 65 you cannot move half of it to your spouse’s tax return.  Taking money out of a spousal RRSP ensures the income is taxed 100% in the hands of your spouse.  The same principle applies if you expect that one spouse will have significantly more income from non-pension sources during retirement.  (Remember the waiting period rule above.)

One spouse is older than 71

The year after you turn 71, you can no longer contribute to your RRSP.  However if you have a younger spouse, you can contribute to their RRSP as long as you have the contribution room.  This could produce significant tax savings, and depending on your situation, the avoidance of having to pay back your Old Age Security.

You are saving to purchase your first home

Under the Home Buyer’s plan, a first-time buyer can withdraw up to $25,000 from their RRSP to aid in the purchase.  A spousal RRSP can allow access to a second $25,000.  This is the case even if one spouse does not work outside the home.

You know the lower-earning spouse’s income will decrease

Perhaps there is the consideration of having a family, or returning to school, or starting a business that will not be profitable in the early years.  Perhaps one spouse is planning to retire earlier than the other does.  These are all good reasons for the higher-earning spouse to contribute to a spousal RRSP that can then be withdrawn and taxed at a lower rate when the time comes.  (Again, remember the waiting period rule above.)

Contributions after Death

No contributions can be made to a deceased individual’s RRSP after the date of death. However, the deceased individual’s legal representative can contribute to a spousal RRSP in the year of death or during the first 60 days after the end of that year.

For more information on using a spousal RRSP, contact a DJB Tax Professional.