Category: Domestic Tax

WITHDRAWING FROM FAMILY RESPs: Flexible Planning Possibilities

Posted on by Edixon

A July 21, 2021, Money Sense article (My three kids chose different educational paths. How do I withdraw RESP funds in a way that’s fair to them and avoids unnecessary taxes?, Allan Norman) considered some possibilities and strategies to discuss when withdrawing funds from a single RESP when children have different financial needs for their education.

Some of the key points included the following:

  • There is likely a minimum educational assistance payment (EAP) withdrawal that should be taken, even by the child that needs it least.
  • The EAP includes government grants (up to $7,200) and accumulated investment earnings on both the grants and taxpayer contributions.
  • The grants can be shared, but only up to $7,200 can be received per child, with unused amounts required to be returned to the government.
  • Only $8,000 ($5,000 in previous years) in EAPs can be withdrawn in the first 13 weeks of consecutive enrollment.
  • The withdrawal amount is not restricted by school costs. • The children are taxed on EAP withdrawals.
  • It is generally best to start withdrawing the EAP amounts as early in the child’s enrollment as possible, when the child’s taxable income is lowest. If the child is expected to experience lower income in later years, there is flexibility to withdraw EAP amounts in those later years instead.
  • The level of EAP withdrawn for each child can be adjusted. As individuals are taxed on the EAP withdrawals, planning should consider the children’s other expected income (e.g. targeting less EAPs for years in which they will be working, perhaps due to co-op programs or graduation). Consider having the EAP completely withdrawn before the year of the last spring semester as the child will likely have a higher income as they start to work later in the year.
  • To the extent that investment earnings remain after all EAP withdrawals for the children are complete, the excess can be received by the subscriber. However, these amounts are not only taxable, but are subject to an additional 20% tax. Alternatively, up to $50,000 in withdrawals can also be transferred to the RESP subscriber’s RRSP (if sufficient RRSP contribution room is available), thus eliminating the additional 20% tax. An immediate decision is not necessary as the funds can be retained in the RESP until the 36th year after it was opened.

ACTION ITEM: The type, timing, and amount of RESP withdrawals can significantly impact overall levels of taxation. Where an RESP is held for multiple children, greater flexibility exists. Consult a specialist to determine what should be withdrawn, at what time, and by whom.

CEBA Loan Repayments and Debt Forgiveness

Posted on by Edixon

****EXTENDED DEADLINES****

CEBA loans must be repaid by JANUARY 18, 2024 to be eligible for partial loan forgiveness.

For eligible CEBA borrowers in good standing, repaying the balance of the loan on or before January 18, 2024, will result in loan forgiveness of up to $20,000.

More specifically, where the outstanding principal other than the amount of potential loan forgiveness is repaid by January 18, 2024, the outstanding principal amount will be forgiven, provided no default under the loan has occurred.   

For example, if you borrowed $40,000 or less, repaying the outstanding balance of the loan (other than the amount available to be forgiven) on or before January 18, 2024, will result in loan forgiveness of 25% (up to a max of $10,000).

If you received a $40,000 loan and subsequently received the $20,000 expansion, repaying the outstanding balance of the loan (other than the amount available to be forgiven) on or before January 18, 2024, will result in loan forgiveness up to $20,000 based on a blended rate:

  • 25% on the first $40,000; plus
  • 50% on amounts above $40,000 and up to $60,000.

For loans outstanding on January 19, 2024, during the period of January 19, 2024 to December 31, 2026, you will be required to pay interest on your CEBA loan and be subject to the following repayment terms:

  • 0% per annum interest until January 18, 2024.
  • No principal repayment required before January 18, 2024.
  • Automatic conversion to a three-year term loan beginning January 19, 2024.
  • 5% per annum interest starting on January 19, 2024; interest payment frequency to be determined by your financial institution.
  • Only interest payments are required to be paid on the term loan beginning January 19, 2024, however, the full principal is due on December 31, 2026.

CEBA loan holders who submit a refinancing application with their financial institution by January 18, 2024, may qualify for an extension of the partial loan forgiveness repayment deadline to March 28, 2024.

We suggest that you contact your financial institution to assist you with making a payment towards your CEBA loan or to submit a refinance application well in advance of the January 18, 2024, deadline.

Replacement Property Rules Pertaining to Real Estate and Business Properties

Posted on by Edixon

When a taxpayer (including a corporation) disposes of real estate for more than its cost, the capital gain must be reported on the taxpayer’s income tax return.  If the taxpayer previously claimed capital cost allowance (CCA) on the building, then that CCA will be recaptured and included in income as well.  However, the Income Tax Act permits a taxpayer, in certain conditions, to elect to defer the recognition of recapture of CCA or capital gains where a property was involuntarily disposed of, or a former business property was voluntarily disposed of, and a replacement property is acquired.  

Requirements for the replacement property rules to apply

There are a number of requirements in order to take advantage of the replacement property rules.  They are as follows:

  • A replacement property can be acquired before or after the former property, as long as it meets the other conditions.
  • For involuntary dispositions such as an expropriation, the replacement property must be acquired before the later of:
    • the end of the second tax year following the year proceeds become receivable for the former property; and
    • 24 months after the end of the year those proceeds become receivable.
  • For voluntary dispositions of a former business property, the replacement property must be acquired before the later of:
    • the end of the first tax year following the year proceeds become receivable for the former property; and
    • 12 months after the end of the year those proceeds become receivable.
  • To qualify as a former business property, the property must be used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business. A rental property does not qualify as a former business property unless it was rented in the year of disposition to a related person who used the property principally for gaining or producing business income.
  • The replacement property must be acquired to replace the former property, have the same or similar use as the former property and, if the former property was used for the purpose of gaining or producing income from a business, the replacement property must be acquired for the purpose of producing income from the same or a similar business.
  • A taxpayer must make a valid election to use the replacement property rules.
Reporting requirements

A taxpayer is required to report any recaptured CCA or taxable capital gain arising from the disposition of a former property in the year of disposition. However, where a replacement property is acquired in a subsequent tax year and within specified time limits, the taxpayer may request a reassessment of the income tax return for the year of disposition of the former property. This will generate a refund in respect of the income tax paid on income arising on the disposition.

Election to use the replacement property rules

A taxpayer must elect to have the replacement property rules apply. The election should be made as follows:

  • If the disposition and replacement take place in the same year, the taxpayer’s calculation (in the income tax return for that year) of the recaptured CCA or the capital gain by virtue of subsection 44(1) will be considered to constitute an election.
  • If the property is not replaced until a subsequent year, the election should take the form of a letter attached to the income tax return for the year the replacement property is acquired. The letter should include a description of the replacement property and the former property, a request for an adjustment to the recapture of capital cost or the taxable capital gain reported, and a calculation of the revised recapture or taxable capital gain.
  • If the replacement property is acquired prior to the year of disposition of the property, the election should take the form of a letter attached to the income tax return for the year in which the replacement property is acquired. The letter should include descriptions of the replacement property and the property that is to be replaced. If the taxpayer late-files such an election, it will be accepted if it is filed in the income tax return for the year in which the former property is disposed of, provided it is evident that the new property qualifies as a replacement property.

The calculation of the tax deferral can be complicated.  The new capital cost of the replacement property is reduced by the capital gain of the former property that was deferred. As a result, when the replacement property is eventually sold in the future, the now lower capital cost is used in determining the capital gain to be realized.  The amount eligible for capital cost allowance purposes will also be reduced, as it is affected by both the deferred capital gain and the deferred recapture.  We at DJB are here to help you work through this complicated tax filing to give you the best tax filing position.

CPP ENHANCEMENTS: Higher Contributions and Higher Benefits

Posted on by Edixon

In 2019, the government commenced a two-part enhancement to the Canada Pension Plan (CPP), with full implementation to be completed in 2025. Phase 1 occurred from 2019-2023; phase 2 will occur from 2024-2025. Overall, the changes will require larger contributions but also will provide larger benefits.

Pre-CPP enhancement

CPP contributions for employees and employers under the pre-enhancement CPP model (referred to as base contributions) were calculated as 4.95% of the employee’s pensionable earnings to a maximum of the year’s maximum pensionable earnings (YMPE; for 2023, $66,600), less the $3,500 basic exemption.

Phase 1

Referred to as the first enhanced CPP contributions, these are calculated as a percentage of the YMPE, less the $3,500 basic exemption, with the contribution rate for employees and employers gradually increasing from 4.95% in 2019 until it reached 5.95% in 2023.

Phase 2

Referred to as second enhanced CPP contributions, the contribution rate for employees and employers will be 4% but will only be applied to earnings above YMPE up to the yearly additional maximum pensionable earnings (YAMPE) ceiling. For 2024, YAMPE will be set at a number 7% higher than YMPE, estimated at $72,400. For subsequent years, YAMPE will be 14% higher, estimated at $79,400 for 2025.

The rates discussed above apply separately to both the employer and employee. Where the individual is self-employed, they are responsible for both the employer and employee contributions.

The payout

The enhanced portion of CPP payouts will only be available to those who contributed since the enhancements were introduced in 2019. Employees that have fully participated under the enhanced contribution regime for sufficient years will receive maximum retirement benefits set at 33% of pensionable earnings, whereas benefits under the pre-enhancement regime would be 25%.

ACTION ITEM: Employers, employees, and self-employed individuals should all be aware that the costs of the CPP will continue to increase as the changes are fully phased in. Individuals should be aware that their take-home pay may be reduced, and employers should budget for these higher costs.

Reimbursements and Allowances for Remote Workers’ Travel Expenses

Posted on by Edixon

Canada Revenue Agency (CRA) considers travel between an employee’s residence and a regular place of employment (RPE) to be personal travel and not part of the employee’s office or employment duties; therefore, any reimbursement or allowance relating to this travel is a taxable benefit

In this article, authored by RSM Canada, they explore in the era of remote work, what is considered to be a RPE.

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FIRST HOME SAVINGS ACCOUNT (FHSA): A New Investment Tool

Posted on by Edixon

The tax-free FHSA was introduced in 2023 to help first-time home buyers save up to $40,000 for a home purchase.

Individuals eligible to open an FHSA must be at least 18 years of age and resident in Canada. The individual must also have not lived in a home that they or their spouse owned jointly or otherwise at any time in the year or the preceding four calendar years.

Contributions to an FHSA are deductible (like an RRSP). Income earned in an FHSA and qualifying withdrawals from an FHSA made to purchase a first home are non-taxable (like a TFSA).

The lifetime limit on contributions is $40,000, subject to an annual contribution limit of $8,000, both of which apply at the individual level. Each spouse (or commonlaw partner) could invest $40,000 and withdraw the full value (including investment income and growth) tax-free to acquire their first home. Individuals can carry forward unused portions of their annual contribution limit up to a maximum of $8,000.

Individuals can also transfer funds from their RRSP to an FHSA tax-free, subject to the $40,000 lifetime and $8,000 annual contribution limits. The maximum participation period for an FHSA ends at the earliest of:

  • 15 years after opening an FHSA;
  • the end of the year following the year of the individual’s 70th birthday; and
  • the end of the year following the year when the individual first makes a qualifying withdrawal from an FHSA.

Any funds remaining in the plan after the maximum participation period could be transferred tax-free into a RRIF or an RRSP without eroding contribution room. Otherwise, the funds will have to be withdrawn on a taxable basis.

Timing of opening an FHSA

A June 28, 2023, Advisor’s Edge article (How to properly plan the opening of an FHSA, Charles-Antoine Gohier) discussed the impact of individuals purchasing homes later in life on FHSA planning.

The article quoted a study from 2020 that estimated that the average age to buy a home in Canada is 36. If an individual opens an account at age 18, the plan must be closed no later than 15 years later, that is, when the individual is 33. If the individual contributes the annual maximum of $8,000 for the first five years to reach the maximum contribution of $40,000, assuming a 4.5% return, the balance of the FHSA would be $74,221 at the end of 15 years. If not used for a home, the individual must either withdraw the balance on a taxable basis or roll the balance into their RRSP on a tax-free basis. While rolling the FHSA into the individual’s RRSP does not erode their RRSP contribution room, no tax-free withdrawal would be possible for subsequent use of the funds to purchase a first home. Up to $35,000 could be withdrawn from the RRSP under the home buyers’ plan, but this would be subject to repayment conditions. Where sufficient funds are available in the RRSP, the home buyers’ plan can be used in conjunction with a tax-free FHSA withdrawal.

Home buyers’ plan (HBP)

In a May 15, 2023, French Technical Interpretation, CRA was asked whether an individual could withdraw $8,000 under the HBP and contribute the funds to a tax-free FHSA, knowing they would purchase a qualifying home the following month.

CRA first noted that the HBP and FHSA can be used for the same home purchase. Provided that the relevant requirements of both plans were complied with, the taxpayer could contribute the HBP withdrawal as a deductible FHSA contribution, then take a qualifying withdrawal from the FHSA in respect of the same home purchase.

This would be an alternative to rolling funds from the RRSP to the FHSA. Using the HBP approach would provide an immediate deduction for the FHSA contribution (a rollover would generate no deduction) but would also require the HBP withdrawal to be repaid to the RRSP in future years to avoid tax. The legislation does not impose any minimum period that contributions must remain in an FHSA before being withdrawn to acquire a home.

Tax-free qualifying withdrawals

A May 23, 2023, Advisor’s Edge article (What are the FHSA qualifying withdrawal rules?, Rudy Mezzetta) discussed the conditions for a qualifying withdrawal.

The taxpayer holding the FHSA must be a resident of Canada at the time of withdrawal and remain so until the qualifying home is acquired.

The taxpayer must also have a written agreement to buy or build a qualifying home before October 1 of the year following the first qualifying withdrawal. Further, they must occupy or intend to occupy the qualifying home as a principal place of residence within one year after buying or building it. The article indicated that CRA had confirmed, in an email, that there is no minimum amount of time that the taxpayer must live in the qualifying home. The article also noted that if the acquisition of the home before October 1 of the following year was frustrated by unforeseen events, the taxpayer may have to provide evidence supporting their intent to occupy the property to avoid the withdrawal being subject to tax.

The individual must also be a first-time home buyer, defined as someone who has not owned or jointly owned their principal place of residence in the current year or any of the previous four years, to make a qualifying tax-free withdrawal. Unlike the requirements for opening an FHSA, home ownership by the individual’s spouse or common-law partner is not considered in the definition of a qualifying withdrawal. The individual may own the qualifying home for up to 30 days prior to the qualifying withdrawal and still be a first-time home buyer.

ACTION: Consider whether opening up and contributing to an FHSA is an option for you or a family member

New Bare Trust Reporting Rules

Posted on by Edixon

Under new Canadian legislation, bare trust arrangements are now subject to the filing requirements of a T3 Trust Income Tax and Information return.  This new legislation applies to trusts with tax years ending on or after December 31, 2023, with significant penalties for failure to comply.

In this important tax alert, authored by RSM Canada, they highlight what information is required to be reported, the deadlines, penalties for non-compliance, and which trusts may be exempt from filing. 

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MULTIGENERATIONAL HOME RENOVATION TAX CREDIT: More Housing Support

Posted on by Edixon

The multigenerational home renovation tax credit is a refundable tax credit applicable to the costs of constructing a secondary suite for an eligible person (generally a relative either age 65 or over, or eligible for the disability tax credit) to live with a qualifying relation. The tax credit is available on up to $50,000 of eligible expenditures incurred after 2022 at a rate of 15%.

In a March 6, 2023, Technical Interpretation, CRA confirmed that the eligible person must ordinarily inhabit, or be intended to ordinarily inhabit, the new dwelling unit constructed, but does not have to reside with the qualifying relation before the renovations are undertaken.

In a second March 6, 2023, Technical Interpretation, CRA was asked whether the construction of a separate, detached housing unit on the same parcel of land as a principal housing unit, such as a carriage house or laneway house, would be eligible. CRA noted that a qualifying renovation must enable the qualifying individual to reside in the dwelling by establishing a secondary unit within the dwelling. CRA indicated that a second detached housing unit located on the same parcel of land as the primary dwelling unit would be considered to be located within the dwelling (that is, the dwelling would be considered to include the subjacent land) and would qualify for the credit.

CRA noted that all other requirements must be met, cautioning that this includes the second property being permitted under local law and regulations, as many municipalities do not permit detached secondary units.

ACTION ITEM: If building a secondary suite for a family member 65 years of age or older, or eligible for the disability tax credit, check whether you can claim this new credit.

Bill C-47: International Tax Amendments

Posted on by Edixon

This article, authored by RSM Canada, highlights the international aspects of the recent amendments to Bill C-47 in Canada’s Income Tax Act.

The article covers the expansion of withholding tax obligations for non-residents, the narrowing of the money lending business exception, and the introduction of a new functional currency and broader stop-loss provision.

The aforementioned changes have compliance implications for companies that conduct business across borders. 

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UNREPORTED CAPITAL TRADES INCLUDED ON A T5008: CRA Policy

Posted on by Edixon

Traders or dealers in securities must report to CRA the disposition of securities, such as publicly traded shares, mutual fund units, bonds, and T-bills, of their clients on a T5008.

A November 4, 2022, French Federal Court case summarized CRA’s administrative policy where a taxpayer has not filed a tax return, but a T5008 was issued, reporting the disposition of property that does not include the cost of the property disposed. In this case, CRA will assess the taxpayer with unreported income by estimating the capital gain to be a percentage of the total proceeds of disposition based on the stock market performance for the year in question (details on how the calculation was made were not provided in the Court case).

In 2015, CRA applied this policy and assessed the taxpayer for his 2008 year with a $967,806 capital gain (taxable capital gain of $483,903) computed as 20% of all proceeds of disposition reported on the T5008. CRA assessed the taxpayer’s income for 2009 at $141,798. The taxpayer did not object to either of these assessments.

In 2019, the taxpayer filed his 2008 and 2009 returns reporting much lower income than CRA had assessed in 2015. As the 2008 return was filed (essentially requesting adjustments to the original assessment) more than 10 calendar years after the end of the year (December 31, 2008), no adjustments could be made to this year. The taxpayer relief provisions only allow an individual to request an adjustment up to ten calendar years after the relevant year. As such, CRA confirmed their 2015 assessment. The taxpayer then tried to argue that the excess of capital gains assessed by CRA over his actual gains for 2008 should be treated as a capital loss carried forward to offset his gains realized in 2009. CRA refused to reassess the 2009 return for this adjustment.

Taxpayer Loses

The Court found that the taxpayer could not indirectly reduce the impact of the capital gain on his 2008 return by claiming a capital loss on his 2009 return.

Commentary

It is typical for brokers not to include the cost base of securities disposed on the T5008 as they may not have the accurate information. Also, even if an amount is reported on a T5008, the transaction may not always result in a gain; some dispositions may be in a loss or break-even position. For example, money market fund dispositions are often reported; however, there is normally no gain or loss.

ACTION ITEM: Ensure to report all gains from the disposition of securities fully; should dispositions not be reported, CRA may assess the taxpayer with unreported income much higher than the actual gain.

Contact one of our Taxation team members for more tax tips and advice.