The Financial Advisor Guide to Taxation
Self-Study Course # 5
OVERVIEW
Upon completion of this course, you will be able to understand which income
sources constitute earned income. You will study tax deductions and tax credits,
and how they will affect your clients and prospects net income. We will look at
how indexing can affect an individual’s tax situation. You will be in a better
position to tell the difference between being an employee of a company, and
being self – employed and at the same time know what deductions and write offs
are available to your clients and prospects who are in a similar situation.
The complex taxation of Life Insurance, Annuities, RRSP’s, and Variable
Contracts will be studied in a way that makes it simple to understand. You will
have a working knowledge of Capital Gains, Capital Losses and the nuances of
Canadian taxation.
Where possible, we have updated the Taxation Rules & Regulations to reflect
any changes for the 2011 and 2012 Tax years.
INTRODUCTION
Today, it is reasonable to believe that high taxes are here to stay. With the
growing cost of government social services, high government indebtedness, and
the high cost of infrastructure, we find ourselves being taxed at very high rates.
To add to this, the taxation laws and regulations are forever changing.
As an Advisor, Agent or Broker, you must develop a good working knowledge of
the Canadian taxation system as it applies to the products and advice that you
provide.
Some of these purchases could include Life Insurance, Disability Insurance,
RESPs, RRIFs, LIFs, Annuities or savings and investment contracts. Employee
benefits or Corporate Retirement Plans can also attract some form of taxation.
As their advisor, you are expected to know the general tax rules pertaining to
each individual area.
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It is not necessary to get into the technical aspects of taxation with your clients or
prospects, but knowing where to find the answers would be extremely beneficial
to you as well as them. Remember that you are a part of their team that includes
the Accountant (tax expert), and their Lawyer.
You may not have all the answers, but you must know who to refer them to.
LOOKING AT INCOME TAX IN A GENERAL WAY
Even though Federal income taxes were first introduced in 1917, the Income Tax
Act has changed many times over the years. These changes are a direct result
of changes in the government’s views on monetary and fiscal policy. Of course,
over the past few years the change in the global economy has had a direct
impact on our taxes as well.
The lion’s share of the government’s revenue comes from the taxes that you and
your clients pay on a yearly basis.
The Canadian Income Tax rules and regulations are one of great complexity and
constantly shifting emphasis. Much of our planning process, whether it is
Financial Planning or Estate Planning, centres on how to minimize tax for our
clients and prospects without breaking the law. With this in mind, we still have to
gain the greatest advantage in the investments and other products that we
market to our clients and prospects.
We must understand how Income Tax relates to their finances and investments
as well as to the products we sell them. Even though we are not qualified to give
tax advice, we must acquire a working knowledge of how it affects the market
place we serve.
Income tax must be paid on income received after allowable deductions have
been taken into consideration.
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Individuals who are resident in Canada are liable for income tax on their
worldwide income. Non-residents are liable on Canadian-source income
(including income from employment in Canada and income from carrying on a
business in Canada) and on capital gains derived from taxable Canadian
property.
Residence means the jurisdiction in which a person regularly, normally, and
customarily lives. Indicators of residency include: ownership of a home in
Canada, whether other members of the individual's family reside there, and
membership in clubs and associations in Canada. Individuals present in Canada
for periods totalling 183 days or more may be deemed resident.
The acquisition of permanent resident status for immigration purposes is a
significant factor. Citizenship has little or no relevance to the question of
residence for tax purposes.
Individuals becoming residents are generally deemed to have acquired all
property, other than taxable Canadian property, owned at that time at a cost
equal to the current fair market value. Individuals ceasing to be resident are
regarded as having disposed of their property, other than taxable Canadian
property, at its current fair market value.
Taxable Canadian property for this purpose is defined as including:

Real property situated in Canada.

Most capital property used in carrying on a business in Canada.

Shares of a corporation (other than a public corporation) resident in Canada.

Shares of a public corporation if, within the five years preceding disposal, the
non-resident and persons with which the non-resident did not deal at arm's
length owned at least 25% of any class of capital stock of the corporation.
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
An interest in a partnership if, at any time during the twelve months preceding
disposal of the interest, the fair market value of taxable Canadian property
held by the partnership constituted 50% or more of the fair market value of all
the partnership property.

A capital interest in a trust (other than a unit trust) resident in Canada.

A unit of a unit trust (other than a mutual fund trust) resident in Canada.

A unit of a mutual fund trusts if, at any time during the five years immediately
preceding the disposal, the non-resident and persons with whom the nonresident did not deal at arm's length owned at least 25% of the issued units of
the trust.

Property deemed to be taxable Canadian property. For example, the owner
of the property may make an election to that effect when he or she ceases to
be resident in Canada. Security has to be provided to Revenue Canada to
cover taxes that would otherwise be payable.
PERSONAL INCOME TAX RATES
Both the federal and provincial governments levy personal income tax.
Provincial income tax is in most provinces is calculated as a percentage of
federal income tax payable and is collected by the federal government on behalf
of the province. For provincial income tax purposes, business income is
apportioned between the provinces when individuals carry on business through
permanent establishments in more than one province. Other income, however,
is generally considered to have been earned in the province in which the
individual resides at the end of the tax year, regardless of where it has actually
been earned.
Federal Income Tax Rates
Canadian federal income tax is calculated based on taxable income, and then
non-refundable tax credits are deducted to determine the net amount payable.
For 2011, every taxpayer can earn taxable income of $10,527 before paying any
federal tax.
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The basic personal tax credit is calculated by multiplying the lowest tax rate by
the basic personal amount. The 2011 tax credit is 15% x $ 10,527 = $1,579.05.
The Department of Finance announced in November 2007 that the lowest federal
tax rate would be reduced to 15%, and certain tax credits would be revised to
compensate for the lower tax rates. The revised rates are being used on 2011
personal income tax returns provided by Canada Revenue Agency (CRA). The
tables below have been revised to include the 15% tax rate and the basic
personal exemption amount increase.
2011 Federal Marginal Tax Rates
2011 Taxable Income
Marginal Tax Rates
Other
Income
Capital
Gains
Eligible
Non-eligible
Dividends Dividends
First $41,544
15.00%
7.50%
-2.02%
2.08%
$41,545 - $$83,088
22.00%
11.00%
7.85%
10.83%
$83,089 - $$128,800
26.00%
13.00%
13.49%
15.83%
Over $128,000
29.00%
14.50%
17.72%
19.58%
Federal personal income tax breakdown
Statistics Canada recently published a study titled Federal Personal Income
Tax: Slicing the Pie, which examines the breakdown of federal personal income
taxes paid by high and low income earners in Canada. The data was merged
with data from The Fraser Institute’s Canadian Tax Simulator to produce the
following information.
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A. Share of federal personal income tax paid
Income group
% of federal personal
income taxes paid
1990
2011
50% with lowest incomes
6.7%
8.5%
40% with intermediate
incomes
47.3%
43.4%
10% with highest
incomes
46.0%
48.1%
All Canadian tax filers
100.0%
100.0%
B. Effective federal personal income tax rates
Income Group
Federal tax as % of income
1990
2011
50% with lowest incomes
4.30%
4.97%
40% with intermediate
incomes
11.75%
9.83%
10% with highest
incomes
17.79%
16.95%
All Canadian tax filers
12.25%
11.00%
C. Share of total income
Income group
% of total income
1990
2011
50% with lowest incomes
19.0%
21.7%
40% with intermediate
incomes
49.3%
47.4%
10% with highest
incomes
31.7%
30.9%
All Canadian tax filers
100.0%
100.0%
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Provincial/Territorial tax rates for 2011
Under the current tax on income method, tax for all provinces (except Quebec)
and territories is calculated the same way as federal tax.
Form 428 is used to calculate this provincial or territorial tax. Provincial or
territorial specific non-refundable tax credits are also calculated on Form 428.
Canadian federal and provincial/territorial income taxes are calculated
separately, although on the same tax return, except for Quebec. The rates are
combined here so that taxpayers can see the total tax rate being paid, including
any provincial surtax.
The combined tax rates in these tables are marginal tax rates, including any
provincial surtax. Other income would include any income from employment,
self-employment, interest from Canadian or foreign sources, foreign dividend
income, etc.
After the income tax amounts are calculated, non-refundable tax credits are
deducted from the tax payable. Non-refundable tax credits include the basic
personal amount, which is available to every taxpayer. A list of most of the nonrefundable tax credits can be seen in the tables of federal, provincial and
territorial non-refundable personal tax credits.
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Top Combined Federal/Provincial Tax Rates — 2011
Combined Top Marginal Rate
Province
Alberta
British
Columbia
Manitoba
New
Brunswick
Newfoundland
& Labrador
Nova Scotia
Ontario
PEI
Quebec
Saskatchewan
NWT
Nunavut
Yukon
Provincial/Territorial
Top Personal Rate
10.00%
Other
Income
39.00%
Capital
Gains
19.50%
Eligible
Dividend
17.72%
14.70
43.70
21.85
23.91
17.40
46.40
23.20
26.74
14.30
43.30
21.65
20.96
13.30
42.30
21.15
20.96
21.00
11.16
16.70
24.00
15.00
14.05
11.50
12.76
50.00
46.41
47.37
48.22
44.00
43.05
40.50
42.40
25.00
23.20
23.69
24.11
22.00
21.53
20.25
21.20
34.85
28.19
27.33
31.85
23.36
21.31
25.73
14.28
Combined rates reflect the following provincial surtaxes:

Alberta – no provincial surtaxes.

British Columbia – no provincial surtaxes.

Manitoba – no provincial surtaxes.

New Brunswick – no provincial surtaxes.

Newfoundland – no provincial surtaxes.

Nova Scotia – 10 per cent on income in excess of $10,000.

Ontario – 20 per cent applies when Ontario tax exceeds $4,028; 36% applies
when Ontario tax exceeds $5,219.

PEI – 10 per cent applies when PEI tax payable exceeds $12,500

Quebec – no provincial surtaxes.

Saskatchewan – no provincial surtaxes.

Northwest Territories – no territorial surtaxes.

Nunavut – no territorial surtaxes.

Yukon – five per cent applies when Yukon tax payable exceeds $6,000.
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Note: All Canadian provinces and territories, except Quebec, have adopted a
"tax on income" (TONI) system of calculating provincial personal income tax.
Quebec continues to administer its own provincial taxes, as it has since 1954.
How Does Indexing Affect Our Taxes?
Inflation, a general rise in prices over time, creates problems for income taxation
because it affects people’s purchasing power—their ability to buy goods and
services. If people’s income and the general level of prices both increase at the
same rate over time, then people’s real income—the amount their income will
buy—remains the same. In other words, if your income doubled, but at the same
time all prices doubled because of inflation, you would be no better or worse off.
However, unless special actions are taken, under the existing progressive
bracket rate schedule, the proportion of your income taken by taxes would
increase.
Increases in income due to inflation can push people into higher tax brackets, a
phenomenon known as bracket creep. In effect, inflation can increase people’s
tax liability without any change in tax law. Amounts subject to indexing include
the various personal credits, the tax brackets for individuals and the thresholds
for repaying government allowances, such as the Old Age Security.
OAS Tax Figures (2011)
Threshold at which the middle tax
rate begins to apply.
$41,544
Threshold at which the top tax rate
begins to apply.
$128,800
Threshold (Claw back) where Old
Age Security commences to be
repaid.
$64,718
Threshold where Old Age Security
is eliminated completely
$109,606
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2011 Federal Personal Tax Credit Amounts
Basic personal amount
$10,527
Age amount (maximum)
$6,537
Amount for eligible dependant
(maximum)
$10,527
Spouse or common-law partner
amount (maximum)
$10,527
Amount for infirm dependent
over age 18 (maximum)
$4282
Pension Income (maximum)
$2,000
Disability amount (maximum)
$7,341
DETERMINING IF YOU ARE AN EMPLOYEE OR SELF-EMPLOYED?
Business Relationship or Employer-Employee Relationship?
Before you advise your clients and prospects in areas of taxation, you should
determine which category of employment status they fall into. It helps to know
whether they are an employee or self-employed.
This gray area has for some time been under scrutiny in our business. Most of
us are commission salespeople. There is no gray area when you deal with your
clients or prospects, they are either an employee, or self-employed. It is
important to know this information before making your financial
recommendations. There may be some tax advantages that would be beneficial
to be one way over another.
When it comes to taxation of income, the government has criteria that they will
look at to see what type of income you have.
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Canada Revenue Agency (CRA) will usually look at four key areas:
1. Control
As a rule, in an employer-employee relationship, the employer will control the
way that work is done and what methods are used. Specific jobs are assigned,
as well as the way in which the job is to be done. If an employer does not
directly control the employees, but still maintains the right to do so, control will
still exist.
The Employer may control:

Work hours.

Quality of the work to be done.

Any reports submitted to the employer.

Any client lists and territories covered.

Any training and development.
If a business relationship exists, the employer will not usually have any control
over the employee’s workday. The employee is left on their own to decide how
and what work will be done.
2. Ownership of Tools

The amount for tools invested,

Values of equipment and tools,

Rental and maintenance of equipment and any tools.
In an employer-employee relationship, the employer will usually supply any
equipment necessary for the employee to do their work. Costs such as any
repairs, rentals, and transportation are also usually at the expense of the
employer.
In a business relationship, tools and equipment are supplied by themselves.
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If an employee purchases any tools or equipment necessary to do their job, it is
at their own expense because they are self-employed perhaps contracted
individuals.
3. Chance of Profit or Risk of Loss

Does the employee / worker have any chance of making a profit?

What are any risks leading to losses from bad debts, damage to equipment or
materials or any delivery delays?

Who covers the operating costs?
In an employer-employee relationship, the employer alone would assume any
risk of loss. An employee is entitled to receive his full salary or wages regardless
of how much a company earns or loses. In a business relationship, selfemployed individuals could profit or have a loss. They cover any operating costs
alone.
4. Integration
This area looks at the possibility of looking at the first three areas and not being
able to determine what your status is. As a rule of thumb, a business relationship
will exist if the worker can integrate his or her own activities with the employer’s
activities. This would mean that the worker is acting on his or her own behalf.
They are not dependent on the payer’s business and he is in business for
himself.
If on the other hand, the worker can integrate their activities to any commercial
activities of the payer, there is a good chance that an employer-employee
relationship will exist. This means that the worker is connected with the payer’s
business and dependent on the employer’s business.
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In order for an employer-employee relationship to exist, the employer must:

Register with Canada Revenue Agency to acquire a Business Number (BN).

Withhold income tax, CPP or QPP contributions, and Employment Insurance
(EI) premiums.

Remit the withheld as well as any required employer’s share of contributions
to Canada Revenue Agency on an ongoing basis.

Report the employee’s income and deductions on the appropriate returns.

Give the employee T4 slips by the end of February of the following year.

Register with Workmen’s Compensation.
In order to have a business relationship, when the self-employed worker’s
income exceeds $500 or any income tax has been deducted, the payer
(employer) must:

Report any self-employed individuals’ income and tax deductions to the
Revenue Canada Agency (CRA).

Provide the self-employed with a copy of their T4A by the end of February of
the following year.
Questions That Should Be Answered to Determine
Employee or Self-Employed Status
Payer
Who is responsible for planning the work to be done?
Who decides how and how much the worker is to be paid?
Who decides on any periods?
Who decides how the work is to be done?
Who decides on the hours of work?
Who decides on the location?
Who assigns the individual tasks?
Who supervises the tasks?
Who sets the standards to be met?
Quality?
Volume?
Time frame?
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Worker
N/A
Who decides whether work must be redone?
Who covers the cost?
Who is responsible for training?
Who covers the related costs?
Who decides on the territory to be covered?
Who decides on periodic activity reporting?
Who decides if the work is to be done by the worker himself?
Who hires helpers?
Who supplies the heavy equipment or covers it rental cost?
Who supplies the specialized equipment or covers cost?
Who covers equipment maintenance costs?
Who supplies the large tools or covers their rental costs?
Who supplies the specialized tools or covers their rental cost?
Who supplies the small tools?
Who covers tool maintenance costs?
Who supplies the materials?
Who has invested in the equipment and tools?
Who covers the costs of damage to equipment or materials?
Who covers the costs of liability insurance?
Who covers the office expense?
Who covers the rental costs?
Who covers delivery and shipping costs?
Who covers costs related to bad debts?
Who assumes responsibility for ensuring that guarantees
relating to materials are honoured?
Who guarantees the quality of work?
Who covers the costs incurred by the worker in carrying out
the work?
Who covers the costs of the worker’s benefits (vacation, sick
leave, life insurance premiums, etc.)?
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Contract Employees
The employment environment has changed over the past years. Many of the
jobs filled by employees are now contracted out. These positions are filled
temporarily and sometimes long term by contract employees. This is looked at,
as a way for the companies to save operating costs, as they do not have to
provide pensions, health benefits etc.
These employees work as independent contractors and offer skills and
knowledge as their employable edge. They sometimes work sequentially for
different employers at once. Either way the transition from paid employee to selfemployed contractor can be a rocky experience.
THREE MAIN SOURCES OF EMPLOYMENT INCOME
Employment income is the main source of revenue for many people, but there
are a few different forms.
The main three are:
1. Direct Compensation
2. Commission Agreements
3. Income for Service
1. Direct Compensation – Wages and Salary
Employee gross income such as: salaries, wages, commissions, directors’ fees,
and all other remuneration received by an officer or employee is included in
income for the purpose of taxation. Canadian residents are taxable on worldwide
income whether the income is remitted to Canada.
Salaries and Wages
If your clients or prospects fall into the employee category, they will receive a T4
slip from their employer(s) for income that they received during the year.
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Commissions
Total commissions are reported in box 42 on all T4 slips. If your clients or
prospects are self-employed salespeople, they should read the tax guide entitled
Business and Professional Income. This helps to determine how to report income
and account for expenses.
Payments may be regulated by:

Provincial Employment Standard

Collective Union Agreement

Individual Employment Contract
In cases such as this, an Employer – Employee relationship will be established.
2. Commission Agreements
These agreements may be varied and complex, but most of them will be
dependent on the sale of a product that generates revenue for the employer.
They may be related to dollar value or volume of sales. The Commission could
be a fixed dollar for each sale or a percentage of revenue. This arrangement
does not establish an employer/employee relationship and in fact, the individual
may be an independent contractor.
3. Income for Service
Food and personal care services may generate tips, gratuities and bonuses. If
you are involved in marketing or other services you may receive performance
bonuses, all of which form taxable income.
Alternate Forms of Income
Indirect compensation can be received in the form of benefits paid by your
employer on your behalf or to your credit. Not all benefits result in a taxable
benefit to the employee.
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CANADA/QUEBEC PENSION PLAN
For 2012, employees and employers must each pay 4.95 % of employees’
contributory earnings. Contributory earnings are those between a certain “floor”
(years’ basic exemption) and “ceiling” (years’ maximum pensionable earnings)
and are subject to change yearly. Self-employed persons must pay 9.9% of
earnings on the same basis.
The 2012 CPP/QPP information at a Glance
Year’s maximum pensionable earnings (YMPE) (ceiling)
$50,100
Year’s basic exemption (YBE) (floor)
$3,500.00
Year’s maximum contributory earnings (YMPE – YBE)
$46,600
Maximum required contribution in 2012
Employee and employer each pays 4.95% of contributory
earnings
$2,306.70
Self-employed pays 9.9% of contributory earnings
$4,613.40
CPP/QPP in a Nutshell

Both employer and employee contribute equally.

Contributions are a mandatory percentage of income, deducted at source.

Employers’ contributions are not a taxable benefit. Employee receives a tax
credit of approximately 15% of their premium paid.

Self-employed individuals pay 100% of premium. Self-employed individuals
can now deduct one-half of their contributions, and use the balance as a tax
credit.
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EMPLOYMENT INSURANCE (EI) PREMIUM RATES
Who has to pay EI premiums?
Employers are responsible for deducting the EI premiums from all
employees, regardless of age. The employer pays a premium of 1.4 times the
employee premium.
Self-employed people do not pay EI premiums, and do not qualify to receive EI
benefits. EI premiums are not payable in some employment situations, such as
when the employee controls more than 40% of the corporation's voting shares,
when the employee and the employer do not have an arm's length relationship
(depending on other circumstances), or some other cases.
For employees, the 2012 premium rate is $1.83 per $100 of insurable earnings.
The rate paid by employers is $2.56 per $100 of insurable earnings.
EI Contribution amounts for selected years
Canada rates
2012
2008
2005
maximum insurable
earnings
$45,900
$41,100
$39,000
employee rate
1.83%
1.73%
1.95%
employee maximum
$840.00
$711.03
$760.50
employer maximum
$1,176.00
$ 994.62
$1,064.70
Québec rates
2012
2008
2006
maximum insurable
earnings
$45,900
$41,100
$39,000
employee rate
1.47%
1.39%
1.53%
employer rate
2.06%
1.95%
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Please note that Québec started providing their own parental benefits beginning
January 1, 2006, so their EI rates are lower.
Who is eligible to collect?
To be entitled to Employment Insurance (EI) benefits you must show that:

you have been without work and without pay for at least 7 consecutive days;
and

in the last 52 weeks or since your last claim, this period is called the qualifying
period, you have worked for the required number of insurable hours. The
hours are based on where you live and the unemployment rate in your
economic region at the time of filing your claim for benefits.
How much does the individual receive?
The basic benefit rate is 55% of your average insured earnings up to a maximum
amount of $485 per week. Your EI payment is a taxable income, meaning federal
and provincial or territorial - if it applies - taxes will be deducted.
You could receive a higher benefit rate if you are in a low-income family (net
income up to a maximum of $25,921 per year) with children and you or your
spouse receives the Canada Child Tax Benefit (CCTB). You are then entitled to
the Family Supplement.
EMPLOYER HEALTH TAX (EHT)
In Ontario and Manitoba the employer is assessed a payroll tax to cover the
costs of Medicare. This is not considered a taxable benefit and must be paid by
the employer. In other provinces, the employer may pay all or part of the
contribution and this is considered a taxable benefit.
Ontario Employer Health Tax - Two key Issues (for illustration purposes)
Ontario-based employers are all too familiar with the multitude of payroll taxes
they must pay, including the provincial Employer Health Tax ("EHT").
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Employers are required to pay EHT calculated at 1.95% of remuneration paid to
employees who:

Report for work at an employer's permanent establishment ("PE") in Ontario
and

Who do not report for work at a PE in Ontario but are paid from or through the
employer's PE in Ontario.
Ontario-based employers with workers on contract and non-Ontario employees
should be aware of the following two issues:
1. Whether an employer-employee relationship exists with their workers on
contract (which would tax these payments for EHT purposes); and
2. Whether their non-Ontario employees report for work at a PE (which would
exempt their remuneration from EHT).
Non-Ontario Employees
It is often a question of fact whether employees residing outside of Ontario report
for work at a PE. For example, a salesperson's home office may be a PE of the
employer if certain factors apply, such as the salesperson conducts business in
the office, the employment contract requires that the salesperson provide an
office, the office is set aside exclusively as an office of the business, etc.
If enough factors apply, employees who are not residents of Ontario could be
considered employees who report to work at a PE outside of Ontario, in which
case the remuneration of these employees would not be included as part of
taxable remuneration and therefore, would not be subject to EHT.
To summarize, if your corporate clients and prospects employ self-employed
contractors or have employees working outside of Ontario, there are risks of
being assessed EHT on payments to these individuals.
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The Health and Post-Secondary Education Tax Levy in Manitoba
The Health and Post-Secondary Education Tax Levy, known as the Payroll Tax,
is a tax imposed on remuneration that is paid to employees.
The Payroll Tax is paid by employers with a permanent establishment in
Manitoba. Employers with total remuneration in a year of $1 million or less are
exempted.
Associated groups (associated corporations/certain corporate partnerships) must
share the $1 million exemption based on the total of their combined yearly
payroll.
Total Yearly Payroll
Tax Rate
$1 Million or Less
Exempt
Between $1 Million and $2 Million
4.3% on the Amount in Excess of
$1 Million
Over $2 Million
2.15% of the Total Payroll (The $1
Million is not a Deduction)
PROFIT SHARING AND STOCK OPTIONS PLANS
Employee Profit Sharing Plan (EPSP)
These types of plans are also registered under section 144(1) of the Income Tax
Act. The employer’s contributions are not subject to any limits. They are
deductible to the employer with immediate taxation to the employee.
An EPSP is an arrangement whereby an amount is paid to a trustee (or trustees)
to be held for the benefit of some or all of your employees. Although such plans
are often used to share profits with key employees, you can also establish one of
these plans exclusively for your benefit and the benefit of your family members
who are employed in the business.
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What are the tax implications of EPSP?
The company accrues a payment to the EPSP trust which is fully deductible by
the company if paid within certain timeliness.
The EPSP trust is exempt from tax and is not required to file a return. However,
there are certain nominal compliance requirements that must be managed.
Each year, the amount allocated to a particular employee is included in the
respective employee's taxable income for the year.
No source deductions are required with respect to the amount allocated to the
employee.
When would an EPSP be beneficial?
If the employer can answer 'yes' to the following questions, an EPSP may be
beneficial to them:

Do they routinely follow a policy of "bonusing-down" to the small business
limit (currently $300,000 federally)?

Are they expecting a large one-time increase in income (possible due to a
sale of a division or business resulting in significant recapture or gain on the
sale of goodwill)?

Do regulatory requirements or their current business structure prevent them
from effectively income splitting with other family members?
Under certain circumstances, an EPSP can be used as an alternative to
traditional remuneration strategies to effectively defer tax and facilitate income
splitting.
What about EPSP tax deferral?
An EPSP can potentially provide an initial tax deferral of one year beyond that
which can be achieved through a bonus accrual. This deferral aspect works best
for corporations with a fiscal year ending after September 3rd (generally,
September 30th, October 31st, November 30th and December 31st.)
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For example, consider a situation where a company's pre-tax income is expected
to be approximately $2,000,000 and the company's year-end is September 30,
2011. The company is planning on declaring a bonus to the owner-manager to
reduce its taxable income to $300,000.
An EPSP could be established so that the amount that would otherwise be paid
as a bonus to the owner-manager is paid to the EPSP. Although the company
can claim the amount as a deduction for its fiscal year ended in 2011, the amount
does not have to be paid to the EPSP until January 28, 2012. The EPSP will then
allocate the amount to the beneficiaries of the plan in 2012 as determined by the
trustees.
If the timing of the transactions is appropriately managed, the approximately
$750,000 in source deductions that would otherwise have to have been remitted
to the CRA on the bonus can be deferred for approximately 12 months. This
amount can continue to be invested for an extra year, generating additional aftertax income.
Employee Stock Option Plans
What is a stock option?
A stock option allows the employee to purchase a certain number of shares at a
specified price (‘the option price’) for a specified period of time. Often there is a
holding period during which the employee cannot exercise the option. Once this
holding period is over, the option is considered ‘vested’ and the employee can
exercise the option any time thereafter until the expiry date, if any.
Stock options are an important way of motivating employees, especially in the
high-technology industry where many start-up companies have grown rapidly into
multinational businesses.
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Because Canada is a relatively high-tax jurisdiction in close geographic proximity
to the world’s dominant high-technology player (the U.S.), the effective use of
employee stock options is particularly critical to Canadian high-tech companies
seeking to attract and retain the services of key employees.
Some firms offer these stock option plans. The dividends earned can boost
retirement income or the stock can be sold at retirement and used to provide
additional income from the capital.
When an individual is granted a stock option by virtue of his or her employment,
there are no immediate income tax consequences.
At the time the option is exercised, however, the excess of the fair market value
of the stock over the option price is fully taxable as an employment benefit,
subject to the two exceptions noted below. For purposes of calculating capital
gains (or losses) on a subsequent disposition of the shares, the tax cost of the
shares acquired will be the fair market value at the time of exercise.
The decision to exercise stock options is motivated primarily by investment
criteria. However, it should be noted that growth in the stock value subsequent
to exercise would be taxed on a future sale as a capital gain. If the shares are
qualifying small business corporation shares, the gain can be reduced using the
enhanced capital gains.
Tax Rules on Employee Stock Option Plans
Taxation of stock options from Canadian public companies
While there are no tax consequences when such stock options are granted, at
the time the employee exercises the option they trigger an ‘option benefit’. This
benefit is equal to the difference between the market value of the stock and the
‘option price.’ This benefit must be included in the employee’s income from
employment in the year in which the option is exercised.
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The employee can claim a tax deduction equal to one-half of the ‘option benefit’ if
the shares are common shares and the exercise price, at the time the options
were granted, was equal to the fair market value of the shares.
Taxation of stock options from Canadian controlled private corporations
Employees of CCPCs do not need to include the ‘option benefit’ in income until
the year in which the employee disposes the shares. As with non-CCPC shares,
the option benefit may be reduced by one-half as long as the exercise price at
the time the options were granted was equal to the fair market value of the
shares. If it does not meet these criteria, an employee may be able to access
another one-half deduction as long as the shares have been held for at least two
years at the date of sale.
Deferring the ‘Option Benefit’
The 2000 Federal budget introduced a deferral of the ‘option benefit’ for nonCCPCs until the employee sells the shares, or is deemed to have disposed of the
shares on death or on becoming a non-resident of Canada. This deferral applies
to options exercised after February 27, 2000, regardless of when the options
were issued.
The amount that may be deferred is limited to the benefit arising on $100,000
worth of stock options vested in a particular year. While the $100,000 amount is
based on the fair market value of the shares at the time the option is granted, the
actual benefit that can be deferred can be much greater.
General Comments on Employee Stock Options & Canada Revenue Agency
A few points are relevant to federal income taxation of employee stock options:
Where employers do not withhold from employees’ salaries any amounts relating
to stock option benefits, it is important for employees to be aware of how much
will be added to their income for tax purposes from the stock option benefit, and
they should set aside an appropriate amount of cash to fund the tax on this
amount (whether from the sale of the acquired shares or from other sources).
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Whenever the employee exercises stock options at a time when she owns other
shares of the employer, she cannot assume that it is possible to immediately sell
the newly acquired shares without realizing a capital gain. This is because the
ITA averages the tax cost of all identical shares held by a person at one time.
As such, if an employee buys 10 shares at $2/share, and later exercise options
to acquire another 10 identical shares at a strike price of $8/share while still
holding the first 10 shares, she cannot sell the 10 newly acquired shares for no
gain. Instead, the ITA deems each of the 20 shares to have a $5 tax cost, such
that an immediate sale of 10 shares will produce a $30 capital gain.
When an employee claims a very large amount in a year under one of the onethird deductions for employee stock option benefits described above, the
possibility of triggering “alternative minimum tax” levied under the ITA must be
considered.
While the ITA rules dealing with the taxation of employee stock options are not
simple, they do offer significant tax advantages for many employees, especially
when the appropriate planning takes place to ensure that the optimum benefits
arise. The stock option rules in the ITA represent one of very few tax
advantages in the ITA available to employees.
Highlights of Stock Option Shares

Payments received are considered taxable income.

Capital gains or losses flow through to the employee.

If the purchase price of the share is below market value, the difference
between the purchase price and the fair market value of the share is a taxable
benefit.
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INCOME FROM BUSINESS OR PROPERTY
Self-employed individuals have the right to control a number of factors in their
work environment. They hiring and firing of staff, the wages or salary to be paid
and the place and manner in which work must be done are all at their control.
They cover any other costs for any tools or other overhead expenses. The risk of
self-employment and the mere fact of not having any guarantees of steady
income are major factors to consider when determining whether an individual will
work for himself or herself or for someone else. Self-employed individuals have
full control over the success of their business venture.
Other Areas that Can Provide Income

Business Income

Income to consider can consist of Salary versus Capital Dividends, Bonuses
etc.
Partnership Income
Partnership income could come from the actual partnership business
arrangement or a Spousal Business Partnership. It could be possible for the
proprietor of a business that is not incorporated to have their spouse as a partner
who is willing to share in the company’s profits or losses.
Qualifications for the spouse
The spouse must have contributed a specified amount of time, or be able to
provide a special skill or some form of training to the business; and to invest
some form of property in the business.
The partnership income should be reasonable under the circumstances. There
should also be a written agreement in place as well.
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Farm Income
Farming is considered a very specialized industry in Canada. It can take in a
wide range of functions such as: tilling the soil, livestock raising or showing, tree
farming, bee-keeping etc. There are many different types of income tax
provisions for this profession that should be considered when dealing with your
clients or prospects.
Loans to shareholders
A loan made to an employee who is also a shareholder, or related to one, is
generally considered being by virtue of the shareholding, rather than
employment. Previously, the full loan amount had to be included in the
individual’s income, unless it was repaid within 12 months of that corporation’s
current fiscal year end. Furthermore, the loan could not be part of a series of
loans and repayments.
In recent years, however, the CRA has shifted its focus; running loan accounts
no longer automatically constitute a series of shareholder loans and repayments.
A revised position, assessing whether taxable benefits exist, places more
emphasis on the use of funds rather than income receipt.
The imposition of taxable benefits is now based on prescribed interest rates, as
applied to the loan principal. Loan repayments are applied to outstanding
balances on a first in, first out basis.
If bona-fide arrangements were made when the loan originated for repayment
within a reasonable period of time, the loan may not be considered income if it
occurred in the ordinary course of the lender’s business or was made to enable
individuals to:

Acquire a dwelling for their own use; or

Purchase an automobile for use in the course of employment; or

Purchase fully paid shares from the corporation or a related corporation
(provided such shares are held by the individuals for their own benefit).
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Some other Business or Property income areas to consider:

Income from trusts and estates.

Shareholders benefits.

Income portion of a payment or arrangement.
Traditional Income from Other Sources

Payments from an RRSP, RPP, DPSP or interest portion of an unregistered
annuity.

Payments from CPP and OAS.

Retiring allowance.

Employer death benefit in excess of $10,000.

Payment from EI benefits.

Alimony or maintenance payments.
To the above income, the following is added:

Supplementary unemployment plans.

Taxable gain from disposal of life insurance.

Accrued interest – annuity or non-exempt life insurance policy.

Flow through gains in a variable contract.

Adult training allowances under the National Training Act, except
personal/living expenses.

Scholarships, fellowships or bursaries in excess of $3000.00 per year
beginning in 2000.

Net research grants.

Indirect payments made for the benefit of the taxpayer.
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CAPITAL GAINS AND LOSSES
Some quick facts about the capital gains exemption in Canada

Share sales qualify for the exemption if and only if they are of a Small
Business Corporation, which is defined in the Tax Act as being a CanadianControlled Private Corporation with generally 90% of its assets involved in
active business.

The shares must have been owned by you or a relative for a 24-month period
prior to the sale and for that same period at least 50% of the assets must
have been used in active business in Canada.

Steps should be taken to “purify” the corporation to take advantage of the
exemption. This normally means removing investments held by the
corporation, as these are assets not used in its active business and could
thus violate the 50% and 90% rules above.

Thanks to the 2007 budget the lifetime Capital Gains exemption is now
$750,000.

Unincorporated businesses - sole proprietorships or partnerships - are not
eligible to use the exemption, which is a prime benefit to incorporation. There
are ways to roll business assets into a newly formed corporation not resulting
in tax.

You can “crystallize” the exemption at a time when the corporation qualifies,
which involves transferring the shares to a holding corporation and electing to
recognize a gain. In case the government decides to eliminate or change the
exemption, you’ve already taken advantage and are protected.
As with any general tax information, your client’s situation could be unique. You
should definitely seek out a Chartered Accountant to review your personal
situation and prepare a plan tailored to you.
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Some new strategies for business owners
Not long ago, the top rate of tax on dividend income was lower than the top rate
of tax on capital gains. This difference led to the development of planning
strategies to take advantage of this fact. However, for a taxpayer in the top tax
bracket, capital gains are now taxed more favourably than dividends. Planning
will now focus on taking advantage of this tax difference. For example, a
common strategy in the past was to transfer part of an operating company’s
surplus into another company prior to selling the operating company’s shares.
This reduced part of the current capital gain on the sale of the shares and
converted it into a future dividend. While this strategy might still be beneficial, a
cost benefit analysis should be performed to determine if this is the most
advantageous approach in light of the change in capital gains rates. So if you are
thinking of selling your shares or otherwise doing some estate or succession
planning, a visit to your tax specialist is in order.
The change in the capital gains inclusion rate is also significant where you own
shares of a Canadian-controlled private corporation (CCPC) on death. Several
planning strategies in the past were based on the fact that it was preferable to
have the share value taxed as a dividend rather than a capital gain.
New strategies are evolving to deal with the fact that capital gains treatment is
now more beneficial.
In addition, if you have done an estate freeze in the past, or otherwise transferred
assets to your company on a tax-deferred basis, there could be a double taxation
problem on death that will have to be addressed. If your clients own shares in a
CCPC, they should contact their tax adviser to see if their present strategy is the
most beneficial to them.
On the downside, the change in the inclusion rate has affected the computation
of the Alternative Minimum Tax (AMT).
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This is a refundable tax that you might have to pay if you sell shares in your
CCPC, or “crystallize” your capital gain and claim on offsetting capital gains
deduction. Depending on your other income, you will now generally be subject to
more AMT in the year the gain is triggered. Planning may be available to
eliminate this tax or lessen its impact.
Investors need to rethink strategies too
You don’t have to own shares in a CCPC to be affected by the change in the
inclusion rate. Now is the time to review your investment portfolio to determine if
it is still tax efficient. Capital gains, dividends and interest are all taxed differently.
With respect to RRSP strategies, it has often been said that you should hold high
tax investments – such as bonds and debentures – inside your RRSP and lowtax investments – such as growth stocks - outside your plan. Although
maximizing your RRSP contribution is still beneficial, if you have sufficient funds
to have both registered and unregistered investments, there may now be more of
an incentive than ever to hold growth equity investments outside of a registered
plan.
Tax planning is a complex process that must be related to individual
circumstances.
Calculations for Capital Gains
Capital gains or losses can arise due to sale, gift or death. Proceeds are actual
sale price if achieved by “arm’s length” transaction, or at “fair market value”.
If property is stolen, destroyed, damaged or expropriated, then proceeds of
disposition are used.

Capital Gain or Loss = Proceeds – (ACB + disposition costs)
Net capital losses can be deducted from net taxable gain. Any excess loss can
be taken back three years and carried forward until loss is exhausted.
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Any net capital loss un-deducted at death can be applied against all other taxable
income in the year of death and previous year.
Valuation Day Calculations

Canadian Shares – December 22, 1971

Capital Property – December 31, 1971
There are two methods of valuation:

Tax free zone method:

The taxable gain is calculated by establishing the values of:
Actual cost of the property on Valuation Day

Fair market value as of December 1971 is deducted from the Net proceeds of
disposition.

Whichever calculation results in the smallest gain is used. This avoids tax on
any pre 1971 gains above the purchase cost.
Valuation Day Method
Uses two reference points:

Value as of December 1971,

Net proceeds at disposal.
The same method must be used for all capital property dispositions.
Exemption from Tax on Capital Gains

Death benefit of life insurance policies.

Bequests between spouses passing at death, outright or to spouse trust (Life
Income).

Inter vivos gifts between spouses (can be treated as a deemed disposition if
elected.

Principal residence – Housing unit owner lives in (includes up to ½ hectare of
land).
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No capital gain applies on property lived in by the taxpayer, spouse (or former
spouse) or child designated and “ordinarily inhabited” by them.
Personal Use Property
No capital gains on proceeds of less than $1,000. No losses can be deducted.
Lottery Prizes and Windfalls
All lottery winnings are received tax-free, but are taxed at disposal. Cost basis
the fair market value at receipt.
Capital Gains Deduction
Capital gains from dispositions of qualified farm property and small-business
corporation (SBC) shares may be eligible for a deduction of up to $750,000
(which, at a 50 per cent inclusion rate represents a $375,000 taxable amount).
An individual’s ability to claim the capital gains deduction may be reduced by
past claims for capital-gains deductions, allowable business investment losses
(ABIL) or a cumulative net investment loss (CNIL).
Cumulative Net Investment Loss
A taxpayer’s cumulative net-investment loss (CNIL) at the end of a year is
defined as the amount by which the total of investment expenses incurred after
1987 exceeds the total of their investment income for those years. The
cumulative gains limit for purposes of the capital-gains deduction will be reduced
by the amount of an individual’s CNIL balance at the end of a taxation year.
Attribution Rules
Income earned from property transferred to a spouse or a minor, will be taxed at
the taxpayers rate except when:

Spouse is paid a salary by taxpayer for services supplied.

Transferred because of an agreement (Separation or Divorce).

Taxpayer received property of equal value from spouse.
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Lifetime Capital Gains Exemption (LCGE)
Under certain circumstances, small business owners, farmers, and fishers may
be eligible for a lifetime capital gains exemption on the first $750,000 of capital
gain realized on the disposition of qualifying capital property.
DEDUCTIONS AND TAX CREDITS
The Income Tax Act requires that the federal non-refundable tax credits be
claimed in the following order:

personal tax credits (i.e., basic personal tax credit, spousal and spousal
equivalent tax credits, and dependant/caregiver tax credits);

age credit for an individual who has attained the age of 65;

credit for employee contributions to the CPP and employee premiums for EI;

credit for an individual who is in receipt of certain pension income;

credit for severe and prolonged mental or physical impairment of:
(i) an individual; or
(ii) a dependant

credit for unused tuition and education tax credits;

tuition credit for fees of a student enrolled at a designated educational
institution;

the tax credit for a student enrolled in a qualifying education program at a
designated educational institution (i.e., enabled through the payment of childcare or attendant-care expenses);

credit in respect of unused tax credits for tuition or education that are
transferred to the student’s parent or grandparent;

credit in respect of unused tax credits for tuition, education, age, pension and
mental or physical impairment of an individual that are transferred from the
individual to the individual’s spouse;

credit for medical expenses;

credit for charitable donations;

credit for interest on student loans; and
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What expenses can be written off against business income?
In general, expenses incurred in order to earn business or property income are
tax deductible. Many of your expenditures will be fully deductible in the year in
which they are made. There are exceptions and limitations.
Capital costs, or fixed assets, such as land, buildings, vehicles, machinery and
equipment, computers, etc. are not fully deductible in the year they are
purchased. These items will be recorded on your balance sheet as assets. For
accounting and tax purposes, you will write off a portion of their cost (except for
land) each year. This is called depreciation or amortization for accounting
purposes, or capital cost allowance for tax purposes. The Income Tax Act
specifies what rate can be used to write off the fixed assets as capital cost
allowance, and will often differ from the depreciation recorded on your financial
statements. Land can never be written off as an expense unless you are in the
business of buying and selling land.
Inventory will be written off against income when the goods are sold. Until that
time, the costs are recorded on your balance sheet as inventory. Prepaid
expenses will only be partly deducted in the year paid. The portion related to a
future fiscal year will be expensed in that year, and recorded on the balance
sheet as prepaid expenses until then.
Accruals should be done at the end of the fiscal period to record costs which
have been incurred but not paid. This ensures that your costs are recorded for
tax purposes, and that you claim your GST/HST input tax credits at the earliest
possible date.
The above information regarding prepaid expenses and accruals describes
record keeping when the accrual basis of accounting is used.
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Those people who are in a farming or fishing business, or who are self-employed
commission sales agents, are allowed by the Income Tax Act to use the cash
basis of accounting, and record all revenues and expenses when the payment is
received or paid.
Your income statement and other financial statements should be prepared
according to "Generally Accepted Accounting Principles", or GAAP. In order to
accomplish this, you need to keep receipts and detailed information about your
expenditures, so they can be properly classified by you or your accountant.
Exempt income is as follows:

Income earned by a member of a First Nations group on a specified reserve;

Payments received by qualified individuals, their spouses and dependants
under the multi-provincial assistance package for individuals infected with HIV
through the blood supply program; payments received by a special trust for
distribution to Canadians infected with the hepatitis C virus through the blood
distribution system over a specified period;

Travel allowances and vehicles received by employees under certain defined
conditions.

War service pension or death benefit received from services in an allied
country.

RCMP benefits arising from injury, death or disability.

Expense allowance for Politicians (up to ½ their salary).
Deductions from Earned Income

Legal expenses incurred to collect salary or wages owed.

Sales person’s expenses away from place of employment (contract of
employment).

Traveling expenses and meal expenses (50% or costs incurred).

Auto expenses (includes depreciation and interest on auto loan, certain limits
apply).
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Deductions from Business Income
Property and business income can be further reduced by:

Expenses incurred to produce income for the property, or business.

Depreciation as prescribed by the Tax Act.

Property taxes or rent on business property

Traveling expenses and meals (50% of the cost) while away from home to
produce business income.

Interest on money borrowed to produce income.

Interest on loans used to acquire property (unless exempt).

Bad debts from taxed accrued income.

Employer contributions, which comprise a taxable benefit.

Investment consulting fees.

Any salary paid to spouse

Accounting, legal, collection, and consulting expenses;

Advertising; amortization of capital assets; bad debts;

Business related memberships and subscriptions;

Business taxes, fees, licenses, dues; workspace in the home (when
appropriate

Certain group benefits; convention expenses;

Delivery and freight; equipment rental;

Insurance (fire, theft, liability); interest and bank charges;

Light, heat and water; maintenance and repairs (other than motor vehicles);

Management and administration fees;

Office expenses (including postage, stationery, telephone and other supplies);

Purchases of materials and supplies; subcontractors’ costs;

Salaries (including the employer’s contribution to C/QPP, EI, etc.);
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A formula to remember:
Net Income
Net Income = Total Income – Applicable Deductions
Allowable Deductions:

Capital portion of annuity payment.

Alimony and maintenance payments.

Legal expenses incurred in collecting alimony and maintenance payments in
arrears.

RRSP and RPP contributions.

Annual dues – Trade Union or Professional Association, except portion levied
for pension, annuities or insurance benefits.

Expenses incurred in objection and/or appealing an assessment of tax,
interest or penalties under the Act.

Moving expenses (move must bring taxpayer 40 KM or closer to place of
employment, university, college or post-secondary education institution).

The deductible amounts are limited to the lesser of actual costs involved in
maintaining the former premises, or $5,000.

Childcare expenses. Child must be under age 16, or if over age 16 must be
physically or mentally infirm. Must have been incurred to enable taxpayer to
earn taxable income. Tuition Fees are deductible as well.

If your employer reimburses all or part of tuition fees paid for professional
development and the courses are, work related and taken for your employer’s
benefit, the payment is not considered a taxable benefit.

Employer deduction for spouse paid salary.

Director’s fees. (Taxable income but does not qualify for RRSP purposes).

Contributions to a Registered Pension Plan or Deferred Profit Sharing Plan.

The employer’s premiums for employee group life are an expense deduction
and the employee receives them as a taxable benefit. The employee cannot
deduct this contribution.
 Employers’ contributions to Private Health Service Plans.
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Other Taxable Benefits

Included in income, but not all are taxed at the current time:

Board and lodging.

Rent free, rent subsidized

Preferred price for purchase of assets.

Awards, prizes and gifts.

Paid membership in professional associations.

Traveling expenses for your spouse.
Examples of Non-Taxable Benefits can include:

Ordinary discounts on the employer’s merchandise, available to all
employees on a non-discriminatory basis; subsidized meals available to all
employees, provided a reasonable charge is made to cover direct costs;

The cost, including laundry, for distinctive uniforms, protective clothing or
footwear required to be worn during employment;

Reimbursement of moving expenses upon relocation;

Receipt of one gift or cash bonus per year not exceeding $100 in value (two
in a year of marriage);

Use of the employer’s recreation facilities, or employer-sponsored
membership in a social or athletic club, where such membership is
considered beneficial to the employer (despite the employer not being able to
deduct the cost of such fees);

Employer-sponsored personal counselling services in respect of mental or
physical health, re-employment or retirement; employer-sponsored travel
where the trip was undertaken predominantly for business reasons;

Tuition, if the course is required for employment and is primarily for the
employer’s benefit;

A reasonable per kilometre automobile allowance; and

Board, lodging and transportation to special work locations.
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AUTOMOBILE EXPENSES
Many people use their cars for work or business and personally incur expenses
in doing so. If this is your situation, you’ll want to be able to deduct those
expenses against the related income. The Canada Revenue Agency (CRA) has
strict requirements for claiming automobile deductions that are designed to
ensure that only true business-related expenses may be claimed. To substantiate
your deduction, you’ll have to maintain detailed records of the expenses you
incur and the kilometres you drive on income-earning activities.
That’s where an Automobile Log comes in handy. It’s a compact, easy-to-use
booklet for keeping track of all your automobile expenses and business driving.
In it, you’ll find forms for recording your gas, oil and other expenses, and the
purpose and details of every trip you make. If you fill out the log throughout the
year, you’ll have all the information you need at year-end to support your tax
deductions.
Information isn’t enough, though. There are some complex rules that apply in
determining how much of your expenses can actually be claimed. This bulletin
outlines some of these rules and explains how to use the log to calculate your
actual deductions.
Bear in mind that there may be special rules that apply to your client’s particular
situation. When in doubt, consult your tax advisor for further information, or for
assistance in preparing your personal tax return. The Automobile Log should
include most of the information your advisor will need to calculate your deductible
automobile expenses. Also, when we refer to tax benefit amounts and deduction
limits in the bulletin, the rate or amount for the year 2007 is listed.
Who should keep records?
Almost everyone who uses an automobile for work or business should be
keeping records of some kind to substantiate their tax deductions.
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If you client’s circumstances match any of the following situations, they
should be maintaining automobile tax records:
1. Your client owns and operates a business, and uses your own car for
business purposes.
As a sole proprietor, you may claim car expenses related to your business.
However, you must be able to show that the expenses were incurred for the
purpose of earning income and were reasonable in the circumstances. Because
your car has both personal and business use, you must keep detailed records of
all expenses incurred and the kilometres driven on business-related activities.
If your business is incorporated, you are likely an employee of your corporation.
In that case, your situation falls under item 3 below. If the car is owned by your
company, see item 4 for more information. Note that if a car is clearly a business
asset and is used 100% for business purposes, then there is no need to keep
separate kilometre and expense records. The expenses would be treated like
normal business costs, and would be fully deductible.
Example
A car or van owned by your business is used throughout the day by you or your
employees to visit clients or run errands for the business, and is left on the
premises at night.
2. You are a partner and use your own car in carrying on the partnership’s
business.
The same points noted under item 1 apply. You must maintain detailed records
of the expenses incurred and the kilometres driven for business purposes.
3. You are an employee and must use your own car in performing your duties.
In order to deduct automobile expenses, you must meet the following conditions:

You must be ordinarily required to work away from your employer’s place of
business, or in different places;

You must be required, under your employment contract, to pay automobile
expenses incurred in the course of performing your employment duties;
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
You must not have received a tax-free car allowance; and

You must have CRA Form T2200 signed by your employer and you should
keep it on file in case the CRA requests it.
You may be receiving an allowance from your employer to compensate you for
the use of your car. If the allowance is a reasonable reimbursement of your
actual expenses, you would treat it as a non-taxable amount, and not deduct any
automobile expenses. However, if the allowance is unreasonably low, you can
include it in your income and deduct your actual expenses, provided that you
meet the conditions above. You would then have to keep detailed records of
expenses and kilometres driven.
The CRA would normally consider an allowance reasonable if it does not exceed
the following rates (for the year 2011):
Province or territory
Cents/kilometre
Alberta
53.0
British Columbia
52.0
Manitoba
49.0
New Brunswick
52.0
Newfoundland and Labrador
55.0
Northwest Territories
61.5
Nova Scotia
53.0
Nunavut
61.5
Ontario
57.0
Prince Edward Island
52.0
Quebec
59.0
Saskatchewan
47.5
Yukon
63.5
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If the allowance exceeds these amounts, or could otherwise be viewed as being
unreasonably high, it may be wise to track actual expenses and kilometres
driven, in order to substantiate this higher amount, should the CRA ever
challenge it.
Also, note that any allowance not calculated wholly on a reasonable “per
kilometre” basis, is in most cases automatically considered taxable by the CRA.
This would be the case, for instance, if you received a flat dollar amount per
month.
4. You are an employee and your employer makes a company car available to
you.
In this case, your employer has incurred the cost of the car (either purchase or
lease), and so you would not have these expenses to deduct.
However, because the car is available to you for your personal use, you are
considered to have received a taxable benefit from employment (the “standby
charge”), which can be a significant amount. If you drive the employer’s car only
during business hours and it is left at the employer’s place of business during
non-business hours, the automobile is not considered to be available to you for
personal use and there is no benefit.
As you can see, most people who use their cars for work or business must do at
least some recordkeeping. In all cases, you should maintain separate records for
each automobile used. Automobile deductions are usually calculated for each
vehicle separately. However, in certain cases, the CRA will allow a calculation
based on combined data.
Most of the commentary in the remainder of this bulletin deals primarily with the
first three situations. For information on employees who use company cars, see
the section entitled “The standby charge”.
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Expenses to track
Once you’ve determined that you should be keeping records, you’ll want to
ensure that you’re tracking everything that’s deductible. When using your car for
work or business, you normally incur two types of expenses: operating expenses,
and fixed costs.
1. Operating expenses
Operating expenses include gasoline, maintenance, oil changes and repairs, car
washes, insurance, license and registration fees. Make sure you track all these
amounts in your log. The Fuel Costs section includes several pages for recording
your gasoline expenses and other information to calculate your car’s “miles per
gallon” performance. Maintenance, repairs and car washes should be recorded in
the section on Recurring Expenses. Insurance, license and vehicle registration
fees can be noted under Annual Expenses.
2. Fixed costs
Fixed costs are amounts that relate to the vehicle itself and do not vary with
kilometres driven. They include capital cost allowance (tax depreciation) and
interest expense for purchased vehicles, and lease payments for leased vehicles.
Each of these items is subject to special rules which limit the portion of the actual
cost which can be included in your total expenses.
Capital Cost Allowance (CCA)
Most automobiles are “class 10” assets: your purchase price (including sales
taxes) is added to a pool of costs with any other class 10 assets you own. Each
year, you are entitled to claim up to 30% of the pool’s balance as CCA (only 15%
in the year of purchase), and include it in your total car expenses for the year.
Any amount claimed in one year reduces the pool balance for the next year’s
calculation.
If you sell a car in the year, you may have a gain or loss, depending on whether
the proceeds are greater or less than the pool’s remaining balance.
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The rules here are complicated, so we suggest you discuss the consequences
with an Accountant.
Also, if you buy a more expensive car, there are rules which could restrict the
amount you can deduct. Again, the specific rules are complex, and basically
prevent you from claiming CCA on any purchase price greater than $30,000 for
vehicles purchased after 2000, plus applicable tax.
Record the details of any purchases or sales in the year in your log, under the
Capital Cost Information area.
Interest expense
If you borrow to buy your car, you can include the interest on the loan in your
total car expenses.
Record on the Monthly Interest Payments page of your log. The amount you may
include is limited to $300 per month for cars purchased after 2008.
Lease payments
If you lease the car you use for work or business, the lease payments also form
part of your total expenses. However, there are limits here as well. The formula
for determining the limits, basically restricts you to deducting only the portion of
the lease payments that relates to the first $30,000 (plus tax) of the cost of the
car, for leases entered into after 2008. The maximum allowable lease deduction
is $800 per month plus taxes.
Again, the calculation can be difficult. Record the terms of your lease in the
Lease Information area of your log and the actual lease payments paid in the
year in the Monthly Lease Payments area, and then discuss it with your
Accountant.
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If you track all car expenses noted above throughout the year, you’ll have the
information you need to determine your tax deduction when the time comes to
prepare your personal tax return. And remember to keep receipts and other
documentation to back up your claims. Although you’re not required to file
receipts with your return, the CRA may ask you to produce them at a later date.
Deductible expenses
At the end of the year, you can summarize your information in the “Automobile
Expense Worksheet” at the end of this bulletin. However, because your car is
used for both business and personal purposes, your total expenses must be
allocated between the two uses on some reasonable basis, with only the
business portion being deductible. The allocation is usually done on the basis of
distance travelled.
That is, the proportion of total expenses that is deductible is determined by
dividing the number of kilometres driven for business purposes by the total
kilometres driven:
Business Km x Total Expenses = Deductible Expenses
Total KM
Therefore, it is essential that you keep records of all work or business trips you
make. This is where the kilometre record of your automobile log comes in handy.
Note that there are some expenses that do not have to be pro-rated. Parking
charges incurred while on business trips are fully deductible, as are car repairs
resulting from accidents that occurred while the car was being used for business.
Using the same rationale, parking expenses and accident repairs resulting from
personal travel are not deductible. Other expenses not related to operating the
car, such as meal and hotel expenses incurred on business trips, may also be
deductible, depending on your particular circumstances.
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Keeping a kilometre log
As you can see, keeping a kilometre log is an important part of tracking your
automobile expenses, since the percentage of business use will determine how
much of your total expenses you can deduct. Generally, the CRA requires that
you record your automobile’s odometer reading at the beginning and end of each
year, in order to determine total kilometres driven. As well, your log should
include the details of each trip taken for work or business by date, destination,
purpose and number of kilometres. Although the log also has columns for
personal kilometres and expenses, this information is not necessary for tax
purposes. Use these areas only if you want to track this information for your own
purposes.
Although CCA and lease payments are usually allocated between business and
personal use on the basis of distance travelled, there is no provision in the
Income Tax Act that requires this.
The CRA has stated that, in certain circumstances, they will accept calculations
based on a combination of distance travelled and the time the vehicle is used for
business purposes.
If you believe that using only distance to determine your deductible percentage
does not provide a true measure of the business use of your car, you may want
to consider keeping track of the proportion of time the vehicle is used on
business, as well.
Beginning in 2005, employees in Québec (with an exception for certain members
of a police force or fire safety service) are required to maintain a logbook and
must remit a copy of the logbook to their employer on or before the tenth day
following the last day of the year during which they (or a related person) had the
automobile available to them for their use, otherwise a penalty of $200 may
apply.
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The following information must be contained in the logbook:

the total number of days in the year the automobile was available for their
use,

on a daily, weekly or monthly basis, the total number of kilometres traveled in
the year; and

the total number of kilometres traveled each day for work including details
identifying place of departure and place of destination, the number of
kilometres traveled between the two places and the purpose of the trip.
Note that for employees or related persons using the automobile for personal
purposes only, the employee will only be required to record the number of days
in the year the automobile is available and the kilometre reading on the odometer
at the beginning and end of each period the automobile is available.
Business vs. personal
At times it can be difficult to determine whether a particular trip is business or
personal. The CRA’s long-held position is that driving from your home to your
place of work is personal travel. On the other hand, the CRA has stated that the
following trips will be considered to be business travel:

a trip from your home to a client’s place of business and back home,

a trip from your home to a client’s place of business and then to your regular
place of work, and

a trip from your regular place of work to a client’s place of business and then
home.
Note that a court case confirmed that this policy is applicable to long-term client
engagements.
Based on the above, it would appear that you can maximize your business travel
by scheduling business appointments on the way to and from work.
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Other motor vehicles
Up to this point, we have referred to the rules for deducting “car” and
“automobile” expenses. It’s important to note that the same rules apply with
respect to any motor vehicle, such as a station wagon, van, bus, pickup truck or
other truck. Employees, partners and business persons in general can deduct
expenses relating to these vehicles, as long as they meet the conditions noted
above.
The restrictions on CCA, lease costs and interest expense for expensive vehicles
discussed above, only apply to “passenger vehicles.” These are motor vehicles
acquired or leased after June 17, 1987 that are designed to carry at most a driver
and eight passengers. Certain types of vehicles are excluded from the passenger
vehicle category and are therefore not subject to the restrictions above. These
include taxis, ambulances, hearses and buses used for transporting passengers.
The exclusion also applies to vans or pickup trucks if they seat no more than the
driver and two passengers and are used primarily for transporting goods or
equipment, or are used more than 90% for transporting goods, equipment or
passengers.
Effective for 2003 and subsequent taxation years, the exclusion from the
passenger vehicle restrictions was extended to clearly marked police and fire
emergency-response vehicles. It was also extended to pick-up trucks that are
used primarily for the transportation of goods, equipment or passengers in the
course of earning or producing income at one or more worksites that are at least
30 kilometres from the nearest urban community having a population of at least
40,000 persons. In addition to the 30 kilometre / 40,000 person tests, any of the
regular vehicle occupants must meet the remote worksite conditions. These rules
are complicated, and you should always consult with an Accountant.
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Effective for 2005 and subsequent taxation years, exclusion from the passenger
vehicle restrictions was further extended to clearly marked emergency medical
response vehicles used to provide emergency paramedic services. As
mentioned, the $30,000 limit and the other limits do not apply to the excluded
vehicles noted above.
The standby charge
Most of the recordkeeping requirements discussed above apply to people who
use their own vehicle for work or business. However, even if your employer
provides you with a car for carrying out your duties, you may still be required to
track kilometres driven to calculate your automobile benefit. The benefit will be
based on the purchase price or lease cost of the car (which will be tracked by
your employer), as well as the business and personal kilometres driven (which
should be tracked by you, in the Automobile Log).
The availability of the car is considered a taxable benefit to you, and a standby
charge will be included in your income.
If your employer owns the car, the standby charge is 2% per month of the car’s
original cost (1-1/2% for automobile salespersons). If the car is leased, it is
2/3rds of your employer’s monthly lease costs (excluding insurance). In either
case, the taxable benefit is calculated on a daily basis for each day that the car is
made available to you, regardless of whether or not you use it for personal
purposes. As noted earlier, a car driven only during business hours and left at the
employer’s place of business during non-business hours is not available for your
personal use and consequently, there is no benefit.
Your employer must report this benefit on your T4 at year-end and withhold taxes
against the benefit throughout the year, just as if it was part of your salary.
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If your total personal driving is less than 20,004 kilometres per year and
represents less than 50% of total use, you may qualify for a reduction of the
standby charge. If the reduction applies, you would include in income only the
fraction of the normal standby charge that your personal distance travelled is of
20,004 kilometres (annual basis). However, you will have to track kilometres
driven to support the reduction. Note that for 2002 and prior years, the thresholds
were 12,000 kilometres per year and 10% of the total use.
If you are just over 50% in personal kilometres, then it is likely worthwhile for you
to try to reduce personal driving below this limit before year-end. Also, you can
reduce the overall standby charge by surrendering control over the automobile to
your employer during periods when you will not be using it, such as vacations.
However, this may not always be practical.
If you are well over the 50% limit, then you will be subject to the full standby
charge and there will be no need to track kilometres driven to support a
reduction.
However, you will still have to do so if your employer pays operating expenses
(both business and personal) or reimburses you for these expenses.
The payment of personal operating expenses by your employer is also a taxable
benefit. The amount of this benefit is calculated as (for travel in 2011):
Number of personal kilometres x 24¢ (2011) and then subtract any amounts
reimbursed by employee (note: this kilometre rate is increasing to 26¢ in 2012).
This amount may bear no relationship to actual operating expenses paid by the
employer. The 24¢ per kilometre rate is reduced to 21¢ for automobile
salespersons. Any reimbursements must be made within 45 days of the year-end
in order to reduce the benefit. If all personal operating expenses are reimbursed
to the employer within the period, then no 24¢ per kilometre amount will apply.
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If business driving is more than 50% of the total, you have the option of basing
your operating cost benefit on 1/2 of the standby charge described above. You
must notify your employer before the end of the taxation year, if you wish to use
this method.
Tax considerations
When you incur automobile expenses, you also pay tax on these expenses. If
you are an employee or a partner in a business, and your employer or
partnership pays you a reasonable allowance to reimburse you for the expenses
incurred, the employer or partnership will likely claim an input tax credit.
CHARITABLE GIVING IN CANADA
Canada has over 75,000 registered charities. Of which more than 40% are
places of worship such as churches and mosques. Other registered charities
include institutions such as universities and libraries, registered Canadian
amateur athletic associations, Canadian municipalities, the federal government
or a provincial government are eligible for a tax credit that reduces the taxes you
have to pay. As a general rule, donations to U.S. charitable organizations qualify
for the credit provided you also have U.S. source net income that is taxable in
Canada.
Without exception, donations may be claimed only after they are paid – pledges
do not count. Unused claims may be carried forward for up to five years and
donations made in the year of death may be carried back one year.
Canadians are extremely generous with the money and time they give to
charitable and other non-profit organizations. But it is a relatively small proportion
of the population that provides the bulk of the help, according to the latest survey
on giving and volunteering. Only 23.1% of tax filers claimed a charitable
deduction in 2009.
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In 2009, Canadian taxpayers claimed 7.8 billion in charitable donations – a
significant drop from 2007 and 2008.
The federal government is making it more attractive for Canadians to donate to
their favourite charities.
In a recent federal budget, Ottawa eliminated capital gains tax on donations of
publicly traded securities to public charitable organizations. It also proposed to
extend this incentive for gifts made to private foundations.
Individuals who are attempting to eliminate capital gains tax have been a huge
catalyst for charitable giving in Canada
Before the rule changes, donors often would sell their securities, pay tax on the
capital gains and then donate the remaining cash. Now, they can donate the
securities directly, fully avoid paying tax on the capital gains, and make a larger
contribution to the charity.
Another benefit is that the donor receives a charitable donation tax credit based
on the current value of the security that can be used to reduce taxes payable on
other income.
Qualifying securities include shares, bonds and mutual funds listed on a
prescribed stock exchange. To be eligible for the tax benefit, donations must be
made to registered charities, registered amateur athletic associations,
governments and government agencies in Canada, and some foreign charities
and universities.
Besides securities, people also can make charitable donations through property,
life insurance policies, annuities, RRSPs and, of course, cash.
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A charitable donation will only qualify for a tax credit for up to 75 per cent of the
donor's net income for the year or up to 100 per cent in the year of the donor's
death.
If the donation exceeds the limit, there is a five-year carry forward provision.
Also, there is a one-year carry back provision if a donation made in the year of
death is not fully claimed in the donor's final tax return.
Despite the tax advantages, most people donate to charities for other reasons,
such as a desire to give to the society, an interest in a cause or simply to help
other people. The largest recipients of donations are religious organizations,
followed by social services agencies, educational institutions and then health
care groups.
Tips for Donors on Charitable Giving
Charities provide many beneficial services to the community in important areas
like education, religion, health care and relief of poverty. To carry out their
charitable work, charities often solicit donations by telephone, mail or in person.
Most charitable solicitations are reputable but some are not.
Here are some tips to help you make sure your donations are used for the good
work you wish to support. Remember it's your money. If in doubt say NO, until
you get the information you need. A donor's best protection is to educate
themselves about the charity.
Tips on Dealing with Canvassers and Telephone Solicitations
Many people who solicit funds are volunteers who donate their time to raise
funds for their charity. But some canvassers or telephone solicitors work for
profit-making businesses that are paid to collect money for charity. Others are
not collecting for charity at all.
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If you are concerned about the legitimacy of a charity, satisfy your concerns
before you donate. You're not wasting the canvasser's time by asking questions.
If you aren't satisfied with the answers, or still aren't comfortable giving to the
charity, do not feel pressured to give.
Here are some questions you might want to ask, and some ways to check
out what you are told:

Ask if your contribution can be claimed as an income tax donation credit. If
so, ask for the charity's registration number. You can check this on the
Canada Revenue Agency's website or by contacting them by phone. Its
contact information is listed below. Not all not-for-profit organizations are
charities. A receipt for your donation is only tax deductible if an official
charitable receipt is issued. Beware, some questionable organizations use a
corporate number to suggest they are a registered charity. A charity
registration number includes the letters RR.

Ask for details about the work the charity does and where it is done.

Ask for the charity's full name and address, who sits on the Board, and how
long it has been in existence.

Ask telephone solicitors where they are calling from.

Ask telephone solicitors to put their request in writing if that would make you
feel more comfortable.

Ask door-to-door canvassers for identification and proof that they are
authorized to solicit funds for the charity. You can call the organization to
make sure the person is legitimate.

Ask if the canvasser is a volunteer or working for a commercial fundraiser.
Many charities use for-profit fundraisers to conduct the fundraising
campaigns. This is allowed, but it can be costly. The charity may get less than
20% of what is donated.

Ask what percentage of the donation will go to the charity, to administration
expenses and if there is one involved, to the commercial fundraiser.
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How to check what you are told
You don't have to give your donation to the canvasser or telephone solicitor right
away. You can get information from the canvasser and check it later or you can
check the charity's website.
The best way to make sure your donation is used as intended is to inform
yourself. Check information given by the canvasser or telephone solicitor with the
charity. Ask for written information about the charity such as brochures
describing the charity's work or annual reports. Be wary of vague answers to
questions and be careful if it appears that the charity is a one-person show.
You can also find out about the charity through other sources. An on-line search
engine of charities registered with Canada Revenue Agency can be found at
www.cra-arc.gc.ca/tax/charities from which you can obtain a charity's Public
Information Return which provides some information about the charity's financial
performance. You can also look up the organization on the Internet or in the
phone book or check the organization with your local Better Business Bureau.
Things to Watch for

Some organizations raise money by using names similar to the names of
well-known charities. Don't be fooled by names that sound like names you
have heard before.

Not all organizations that sound like charities are charities. For example,
some businesses calling to collect used clothes and furniture may be for-profit
businesses.

Never give out personal/financial information, such as your credit card
number, over the telephone.

Charitable donations should be made by a cheque payable to the charity, not
in cash.

Don't be pressured to donate immediately. Be wary if a telephone solicitor
offers to pick your money up immediately. If unsure, say no.
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
Don't feel pressure to donate to get a "free" gift. A gift can reduce the amount
of your income tax deduction.
Charitable Giving Plan
You may want to consider making a "Charity Giving Plan" to plan your donations.
The Giving Plan sets out how much you will give through the year and which
charities you will give to. A Giving Plan helps make your charitable giving fit your
budget. It also helps you to think about the types of charities you want to support.
If you are asked to give to a charity you are not familiar with, you can tell them
you have a Giving Plan and you need information and time to determine if this is
the type of charity you want to support.
If you make a Giving Plan, you might want to decide on an amount to give to
charities not listed on your plan. For example, there may be fundraising
campaigns at work or victims of a natural disaster who need special and
unexpected, help.
Many charities can be helped by donations of goods and services, in addition to
money. Even if you cannot give money or goods to a particular charity, you might
be able to donate your time or services
Selecting the Charities
There are many well run charities, so it is difficult to decide which charities to give
to. The best way to choose which charities to support is to become informed.
Many people become familiar with a charity by becoming involved either as a
volunteer or as a user of their services. If you believe it is a well-run and useful
charity, then you might consider giving money to it.
You do not need to limit your donation to an organization you are involved in. For
persons who have the time, they can become familiar with a charity by using
some of the tips previously mentioned in this bulletin.
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What is considered a gift for tax purposes?
A charitable gift is a voluntary transfer of money or property for which you expect
and receive nothing of value in return. Gifts can include:

Cash

Gifts in kind such as stocks, bonds or real estate

A right to a future payment (e.g. life insurance)

Certified cultural property (significant works of art and artefacts)

Land that is considered to be ecologically sensitive and important to Canada's
environmental heritage
What is not considered a charitable gift?
Certain donations are not considered gifts for tax purposes:

Time or services

Property of little value, such as worn-out furnishings

Gifts for which personal benefit is received
Is there a limit to what I can claim credit for?
Yes. Generally, each year you can claim credit for donations not exceeding 75%
of the “net income” reported on your federal tax return. For donations of
ecologically sensitive land and Canadian cultural property, the limitation is 100%
of your net income for the year.
What are my charitable giving options?
The following includes some of the gift options mentioned previously, as well as
additional methods appropriate for unique circumstances and large or ongoing
gifts:

Simple cash gifts including a one-time cheque or regular payments deducted
from your paycheque

Gifts in kind such as tangible property (stocks, bonds, mutual funds or real
estate)

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
Donation of a Registered Retirement Savings Plan (RSP) or Retirement
Income Fund (RIF)

Donation of an existing life insurance policy, typically a whole life policy that
has a cash surrender value

Deferred gift of a life insurance policy

Charitable gift annuity, which enables you to give a lump sum to a charity in
exchange for periodic income

Charitable remainder trust (This is a living trust that you establish by
contributing cash or other property. Throughout your lifetime you receive
income from the trust. Upon your death, the "remainder" passes directly to the
charity.)

Endowment fund, which allows you to make a very large donation to help an
institution fund scholarships, fellowships and more

Private charitable foundation (This is a non-profit organization that can be
established by an individual, family or small group to award grants or make
contributions to registered charities. It offers the most flexibility in charitable
giving, but can require a significant amount of time and money.)
What should I consider before making a charitable gift?
Most charitable gifts that qualify for tax credits are one-way transactions. You
cannot take back the donation. Before making a large commitment, make sure
you will have enough money to meet your future needs and those of your family.
Tax Planning Implications of Charitable Donations
In 2011, the first $200 you donate is eligible for a federal tax credit of 15% of the
donation amount. After the first $200, the federal tax credit increases to 29% of
the amount over $200. Generally, you can claim all or part of this amount up to a
limit of 75% of your net income while alive and 100% in the year of death. For
gifts of certified cultural property or ecologically sensitive land, you may be able
to claim up to 100% of your net income. See an Accountant for more information.
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You may also be eligible for a provincial tax credit. The amount of the provincial
tax credit available varies between provinces.
Donations must be made by December 31st to be claimed against your income
for the current year. However, you do not have to claim all of the donations you
made this year on your current-year return. You can carry forward any donations
you do not claim in the current year and claim them on your return for any of the
next five years. You can only claim donations once. You have to claim tax
credits for gifts you carried forward from a previous year before you claim tax
credits for gifts in the current year. If you are claiming a carry forward, attach a
note to your return indicating the year of the return with which you submitted the
receipt, the portion of the eligible amount you are claiming this year, and the
amount you are carrying forward. The donation tax credit gives a return
equivalent to the lowest marginal tax rate (in your province) x $200 on the first
$200 that you donate, and the highest marginal tax rate tax credit on the
remainder.
Below is a table of the lowest and highest marginal tax rate for 2011 by
province/territory:
Province
62
Low
High
Alberta
25.00%
39.00%
British Columbia
20.06%
43.70%
Manitoba
25.80%
46.40%
New Brunswick
24.10%
43.30%
NF & LAB
22.70%
42.30%
Northwest Terr.
20.90%
43.05%
Nova Scotia
23.79%
50.00%
Nunavut
19.00%
40.50%
Ontario
20.05%
46.41%
PEI
24.80%
47.37%
Quebec
28.53%
48.22%
Saskatchewan
26.00%
44.00%
Yukon
22.04%
42.40%
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For example, if a resident Newfoundlander donates to charity in 2012, the lowest
marginal tax rate would be 22.70% and the highest marginal tax rate would be
42.30%. If this person donated $1000 to charity that year, he would receive
($200 x 22.70%) + ($800 x 42.30%) = $383.80 as a tax credit for that year.
OTHER GIFTS
Donations do not always have to be in the form of money or tangible property.
The donation of a life insurance policy to a registered charitable organization
qualifies for the credit, provided certain conditions are met. The amount eligible
for the credit is the cash surrender value of the policy and any accumulated
dividends and interest at the time of the transfer. Under certain conditions, the
gift of a residual interest in a trust or estate may also qualify for the credit. Your
tax adviser can provide additional information in these areas.
Charitable gifts made on the death of an individual may qualify for the charitable
donation tax credit in the year of death and prior year. Effective for deaths
occurring after 1998, the charitable donation tax credit is extended to donations
of RRSP, RRIF and insurance proceeds that are made pursuant to a direct
beneficiary designation. Previously, the tax credit was only available where the
amounts were donated under the individual’s will, in which case, the amount
donated was subject to probate.
Art Donations
For purposes of computing capital gains, the adjusted cost base and proceeds of
disposition of personal-use property are both deemed to be at least $1,000.
However, this rule will not apply if property is acquired after February 27, 2000 as
part of an arrangement in which the property is donated as a charitable gift.
This measure is intended to ensure that small donations will be subject to tax on
capital gains if the donation value exceeds the donor's cost. It is primarily aimed
at the charitable art arrangements that have been marketed recently.
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In addition to this rule, there is another rule that could assess a civil penalty
against the promoter of the art arrangement if it includes a false statement or
omission that may be used for tax purposes by another person.
Donation of Stock Option Shares
Gifts of Securities
Federal tax incentives have made it very attractive to donate publicly listed
securities that have appreciated in value. For gifts of equities, bonds, futures and
mutual fund units, Canadians are taxed on only 25 percent of the capital gain as
opposed to 50 percent should the securities be sold out right.
Advantages of Gifts of Securities
Reduce your capital gains by half
When you sell publicly listed securities, you must pay capital gains tax on 50 per
cent of the increase in value since you bought them. You can't escape this tax - if
you don't pay it in your lifetime, your estate or that of your spouse must pay the
tax.
But if you donate these same securities to a charity, you only pay capital gains
tax on 25 per cent of their increase in value. By giving to a charity, your taxable
capital gain is cut by half.
Receive a charitable tax credit for the full market value of the securities
When you give securities to a charity you receive a tax receipt for their full market
value. A portion of this tax receipt will offset the capital gains tax, and the
remainder can be applied to a maximum of 75 per cent of your other taxable
income. Donations in excess of the annual limit may be carried forward and used
in any of the five subsequent years. These tax benefits make it attractive to make
a significant gift to the charity of your choice.
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Your estate can get the same tax benefit
If you leave securities to a charity through your will, your estate will get the same
tax benefit. Gifts made through your Will can be claimed up to 100 percent of
your net annual income in the year of death and the year preceding.
Things to consider when making a Gift of Securities
Highly appreciated securities provide the means to make a low-cost significant
gift. The chosen charity will issue a charitable tax receipt for the fair market
value of the gift to be used for tax purposes. The fair market value will be the
closing price of the securities on the date the securities are delivered. In
summary, if you are in the top marginal income tax bracket, you have made other
charitable contributions exceeding $200, and you give $100,000 worth of
appreciated securities instead of cash, you would save an additional $9,282 in
taxes.
An example of how the donation will work
Mr. Brown gives the charity of his choice publicly traded securities that he bought
for $20,000. The securities are now worth $100,000. The capital gain is $80,000.
Mr. Brown's combined federal and provincial tax rate is 40 percent and he has
made other charitable contributions exceeding $200.
Sell shares &
donate cash
Donate stock
Fair market value of shares
$100,000
$100,000
Cost base
$20,000
$20,000
Capital gain
$80,000
$80,000
Taxable portion of gain
at 50%
$40,000
at 25% $20,000
Donation Tax Credit @
46.41%
$46,410
$46,410
Tax Payable on Gain @
46.41%
$18,564
$9,282
Tax savings
$27,846
$37,128
Net cost of $100,000 gift
$72,154
$62,872
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RETIREMENT PENSION AND RRSP’S

Employer’s contributions are taxable benefits.

Employee’s contributions are source deducted.
Employees can deduct both contributions up to their maximum contribution.
Registered Retirement Savings Limits
The proposed limits for registered pension plans deferred profit sharing plans
and registered retirement savings plans are:
Annual
Contribution Limits
Defined Benefit
RPPs
RRSPs
Money
Purchase
RPPs
Max Pension
Benefit per
Year of Service
2005
$16,500
$18,000
$2,000
2006
$18,000
$19,000
$2,111
2007
$19,000
$20,000
$2,222
2008
$20,000
$21,000
$2,333
2009
$21,000
$22,000
$2,444
2010
$22,000
$22,450
$2,494
2011
$22,450
$22,970
$2,552
2012
$22,970
$23,820
$2,647
Year
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CANADA CHILD TAX BENEFIT (CCTB) PAYMENTS
CCTB payments for the 12 - month period of July 2011 to June 2012 are
calculated using the following information:

The number of children you have;

Your province or territory of residence;

Your 2010 family net income and;

Your child's eligibility for the Child Disability Benefit.
Basic benefit:
The basic benefit is $1,367 ($113.92 a month) for each child under age 18.
There is a supplement of $95 ($7.92 a month) for your third and each additional
child. The Government subtracts a benefit reduction from this amount if your
family net income is more than $41,544. For a one-child family, the reduction is
2% of the amount of your family net income that is more than $41,544. For
families with two or more children, the reduction is 4%.
National Child Benefit Supplement (NCBS)
First child

$2,118 a year ($176.50 a month). This amount is reduced as soon as family
net income is more than $24,183. It is completely phased out when family net
income reaches $41,544.
Second child

$1,873 a year ($156.08 a month). This amount is reduced as soon as family
net income is more than $24,183. It is completely phased out when family net
income reaches $41,544.
Third child

$1,782 a year ($148.50 a month). This amount is reduced as soon as family
net income is more than $24,183. It is completely phased out when family net
income reaches $41,544.
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What determines the maximum payment for the National Child Benefit
Supplement?
The National Child Benefit Supplement (NCBS) is intended for low-income
families with children. Therefore, the maximum is paid only if family net income is
less than $24,183. It is reduced by a percentage amount (which depends on the
number of children) when family net income is more than $24,183
Child Care Expenses
Child care costs are not claimed as a non-refundable tax credit, but as a
deduction from income on line 214 of the personal tax return. A non-refundable
tax credit is always at the lowest tax rate (except in Québec), but a reduction of
income would save tax at the taxpayer's marginal tax rate.
In most cases, child care expenses for an eligible child must be claimed by the
parent with the lower net income for tax purposes. If the parents are separated
and share custody, each parent may usually claim a portion of the child care
costs.
An eligible child is a child of you or your spouse or common-law partner, or a
child who was dependent on you or your spouse or common-law partner, and
whose net income (in 2012) was $10,527 or less. The child must have been
under 16 years of age at the beginning of the year, unless the child was mentally
or physically infirm.
If you qualify and your child is under the age of 7, you could claim up to $7,000 a
year. If your child is over 7 but under age 16 years of age, you may be able to
claim up to $4,000. There is no age limit if you have a disabled child, and you
could be able to claim up to $10,000.
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Allowable child care expenses are those paid for the care of an eligible child, to
enable the parent to earn employment income, carry on a business, attend an
eligible program at a designated educational institution for at least 3 consecutive
weeks, or carry on research or similar work for which a grant has been received.
Some examples of eligible child care expenses include day-care centres and day
nursery schools, some individuals providing child care services, day camps and
day sports schools, educational institutions (the portion of costs relating to child
care services), boarding schools, and overnight sports schools and camps.
Child care services provided by a relative
Costs for child care services provided by a person 18 or over who is related to
you are eligible as child care expenses, as long as you or another person did not
claim a tax credit for that person in the following categories of the personal tax
return:

line 305 - amount for an eligible dependent

line 306 - amount for infirm dependents age 18 or over

line 315 - caregiver amount
Single parents may also claim a deduction for child-care expenses incurred
during the months they pursued full- or part-time education at a designated
institution. In two-parent families where one spouse or common-law partner is
working while the other is studying full- or part-time, the working spouse is
eligible to claim a deduction.
These available deductions, calculated by formula, closely parallel the claim
criteria listed above. Check with your accountant to determine which options are
applicable to you.
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Alimony, Maintenance and Child Support Payments
Spousal support payments, which used to be more commonly referred to as
alimony and maintenance payments, are deductible by the payer and taxable to
the recipient, defined as the "spouse or common-law partner or former spouse or
common-law partner of the payer," provided certain conditions are met.
Generally, the payer and recipient must be living apart, both when payments are
received and for the balance of that year; also, payments must be an allowance
made periodically, either directly or to a third party under a written agreement or
court order.
A lump-sum payment stipulated in any legal arrangement would not constitute a
periodic payment and, therefore, probably not qualify as being tax-deductible by
the payer. However, where the legal agreement specifies that a periodic payment
take place and the payer makes a lump sum payment in respect of arrears under
that agreement, that payment would probably qualify as being tax deductible by
the payer, with the recipient having to include it with his/her taxable income.
Payments made before a written agreement or court order has been issued are
also deductible if the agreement or order specifically provides that payments
made earlier in the year or the immediately preceding year qualify.
Living expenses specifically determined by a court order or written agreement to
be payable directly to a third party are not deductible by a taxpayer unless the
payment was made at the discretion of the recipient. If, for example, a taxpayer
must pay monthly rent expenses directly to a former spouse’s landlord as per an
agreement, those expenses are non-deductible. However, if such payments were
made to the landlord at the discretion of the former spouse, who could change
the arrangement at any time to have the amounts paid directly to him/her, they
would be deductible.
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Child support payments are treated differently. Recipients do not include child
support payments in their income nor does the payer deduct such payments for
tax purposes, if they originated pursuant to a written agreement or court order
made on or after May 1, 1997.
Prior to that date, child support paid pursuant to a written agreement or court
order was deductible by the payers and taxable to the recipients.
Parents with existing agreements made before May 1, 1997 have the option of
filing a joint election with the CRA to apply the new tax treatment to payments
made after April 30, 1997. Once the tax treatment has been changed, however,
parties will not be permitted to return to the old rules.
In order for an allowance to qualify as child support, it should generally be
payable on a periodic basis (typically weekly or monthly), with provisions to
continue for either an indefinite period or until the occurrence of a specified future
event, such as a child attaining the age of majority.
Legal fees incurred to establish child support are deductible. Should a portion of
the legal fees paid in a divorce settlement be for obtaining child support, the onus
is on the taxpayer to establish that proportion of directly related fees.
Legal costs incurred to enforce pre-existing rights to interim or permanent
support amounts or to defend against the reduction of support payments
(whether child support or otherwise) are both deductible, provided they are not
incurred against an estate. The CRA used to rule that legal fees incurred in
establishing the right to spousal support amounts were not deductible because
such costs were for personal or living expenses.
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However, as the result of the decision in a 2000 court case (Gallien), the Agency
announced in October 2002 that it had changed its position and now considers
legal costs incurred to obtain spousal support under the Divorce Act or applicable
provincial legislation in a separation agreement to have been incurred as a result
of enforcing a pre-existing right to support and are, therefore, deductible.
Similarly, the CRA has also changed its position with regard to legal costs
incurred by a taxpayer to increase spousal or child support once an original
court-imposed settlement has been passed. These are also now deductible.
(Generally, the CRA’s position change will only affect assessments and
reassessments made after the ruling and will not apply retroactively, unless a
Notice of Objection has either already been filed and remains outstanding, or can
still be filed). Taxpayers must also be cognizant of any relevant provincial laws
with respect to support or maintenance that might apply to them.
Moving Expenses
Taxpayers may claim eligible moving expenses to change residences within
Canada, provided the move brings them at least 40 kilometres closer (using the
shortest normal route) to a new job, business location in Canada, or postsecondary institution at which they begin full-time attendance.
The claim amount is limited to income from the new business or employment, or
taxable scholarships, fellowships, bursaries, prizes and research grants, either in
the year of the move or the following year. For individuals who are reimbursed in
whole or in part, the full amount of the moving expense can only be claimed as a
deduction if the reimbursement amount is also included in calculating income.
Eligible moving expenses include:

Travel costs, such as reasonable amounts for meals and accommodation to
move the individual and members of their household;

Storage costs for household effects;

Costs for up to 15 days of temporary board and lodging near either residence;
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
The cost of cancelling a lease or selling the old residence as a result of the
move;

Legal fees; and

Transfer taxes or taxes upon registration of title to the new residence only if a
former residence has been sold.
Additional expenses with respect to maintaining a vacant former residence, such
as mortgage interest, property taxes, insurance premiums, maintenance of heat,
power and utility connections, along with certain personal costs to revise legal
documents to reflect the new address, are also deductible. The deductible
amounts are limited to the lesser of actual costs involved in maintaining the
former premises, or $5,000.
Limited tax-free compensation may be available where employers reimburse
employees to cover for a loss or diminishment in the value of their former home.
Compensation of up to $15,000 for an eligible housing loss is tax-free. If the
compensation exceeds $15,000, half that excess is taxable.
Northern Resident Deduction
Special deductions, such as those relating to accommodation and travel benefits,
are available to taxpayers who reside in designated northern areas defined as
either a "prescribed northern zone" or a "prescribed intermediate zone" (which
collectively encompass all three territories, plus parts of Canadian provinces with
the exception of those in the Maritime region) for a continuous period of not less
than six months beginning or ending in the year.
ADDITIONAL TAX CREDITS – 2011
Age Credit
Federally, individuals age 65 or older in the year are entitled to a credit of 15 per
cent on $6,537 or $980.55.
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Disability Credit
Federally, a 15 per cent credit on $7,341 or $1,101.15, is available to any
individual whom a Canadian medical doctor certifies on Form T2201 is suffering
from severe and prolonged mental or physical impairment. Once Form T2201 is
on file with the CRA, it doesn’t need to be resubmitted annually.
Other professionals may also certify specific disabilities.
For instance, an optometrist can certify sight impairment or an audiologist can
certify an individual’s hearing disability. Occupational therapists and
psychologists can also certify a taxpayer’s physical or mental disability,
respectively.
The impairment is considered severe if the disability markedly restricts the
individual in daily-living activities, such as walking, speaking, feeding or dressing,
among others, and prolonged if the disability lasts, or is expected to last, for a
continuous period of at least 12 months. The courts, however, have often taken a
compassionate approach toward defining whether a person is restricted in the
activities of daily living and in so doing, have considered the overall impact that a
disability has had on his/her life.
In 2002, for instance, the Tax Court of Canada ruled that although an individual
suffering from chronic fatigue syndrome was not markedly restricted from
performing any one of the CRA’s specified basic activities of daily living, she
nevertheless qualified for the credit because of the cumulative restrictive effects
the illness had on her ability to function.
The disability tax credit (DTC) also extends to individuals who have been certified
by a medical doctor to require therapy at least three times a week, averaging a
total of at least 14 hours, to deal with a marked restriction in their ability to
perform a basic activity of daily living.
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Amount for infirm dependants age 18 or older
If you are supporting an infirm dependant aged 18 or older who is your or your
spouse’s or common-law partner’s relative, who lives in Canada, and whose net
income for the year will be $6,420 or less, enter $6,402. You cannot claim an
amount for a dependant you claimed on line 8.
If the dependant's net income in 2012 will be between $6,420 and $12,822 and
you want to calculate a partial claim, get the Worksheet for the 2012 Personal
Tax Credits Return (TD1-WS) and complete the appropriate section
OTHER PERSONAL CREDITS
Caregiver Tax Credit
If you are taking care of a dependant who lives with you, whose net income for
the year will be:

$15,033 or less (2012), and

who is either your or your spouse's or common-law partner's:

parent or grandparent (aged 65 or older), or relative (aged 18 or older) who is
dependent on you because of an infirmity, enter $4,402.
If the dependant's net income for the year will be between $15,033 and $19,435
and you want to calculate a partial claim, get the Worksheet for the 2012
Personal Tax Credits Return (TD1-WS) and complete the appropriate section.
This credit is not available on behalf of individuals for whom the equivalent-tospouse credit or infirm-dependant credit has already been claimed.
Medical Expense Credit
An individual may claim a credit for any non-reimbursed medical expenses.
The federal portion of this credit consists of 15 per cent of expenses in excess of
the lesser of:

$2,052 (in 2011)

Or three per cent of the individual’s net income for the year.
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Such expenses may be incurred on the taxpayer’s own behalf or that of their
spouse or common-law partner, or child of the taxpayer under the age of 18.
Medical expenses may also be claimed for dependants other than a spouse or
common-law partner or child of the taxpayer under the age of 18. The previous
cap on these claims (i.e., $10,000) was eliminated in 2010.
In most cases, medication must be prescribed by a registered physician or
dentist and dispensed and recorded by a qualified pharmacist if such expenses
are eligible to be claimed for the medical expense tax credit. Remedies
prescribed by an individual who practices alternative medicine, and is not
licensed in the medical field, are not deductible.
Receipts must support expenses claimed. Normally, these expenses can be
claimed for any 12-month period ending in the year but should the return be
prepared for a deceased taxpayer, that period is expanded to encompass claims
for any 24-month period, including the individual’s date of death.
The list of expenses eligible for the medical-expense tax credit includes, but is
certainly not limited, to:

Attendant care for disabled workers—up to two-thirds of earned income with
no maximum;

Full-time attendant care for individuals with severe and prolonged mental or
physical impairments, including all expenses with no maximum;

Supervision of an individual eligible for the disability tax credit who is residing
in a Canadian group home devoted to the care of people with a severe and
prolonged impairment;

Part-time attendant care—up to $10,000 federally, increasing to $20,000 if
the individual died during the year;

50 per cent of the cost of an air conditioner needed for a severe chronic
ailment, to a maximum of $1,000; 20 per cent of the cost of a van that is, or
will be, adapted for the transportation of an individual using a wheelchair, to a
maximum of $5,000;
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
Expenses incurred for moving to accessible housing, to a maximum of $2,000

A device such as a wheelchair to assist an individual with a mobility problem;

Sign language interpreter fees;

Voice recognition software necessary to assist a disabled person;

Various medical devices required to assist with impaired seeing or hearing;

Tutoring services from a non-related person for individuals with a certified
learning disability or mental impairment;

Certain costs related to attending an educational facility with specialized
personnel, equipment or facilities to address a physical or mental handicap;

A portion of reasonable expenses relating to construction or renovation costs
incurred to assist a severely disabled individual gain access to, or be mobile
or functional within, their principal place of residence;

Reasonable expenses for driveway alterations made to enable a mobilityimpaired individual to access a bus; and

Reasonable travel expenses incurred to obtain medical services not available
in the vicinity of the patient’s home, to the extent these have not been
reimbursed by a provincial health plan, or other source.

The list of expenses eligible for the medical expense credit is lengthy. For a
review of eligible medical expenses, refer to CRA publication IT519R2 or
other related documents.
A refundable tax credit is available to individuals with high medical expenses and
low annual income. That feature was announced in the 1997 federal budget,
which also broadened the rules governing income earned by a trust established
for the benefit of a disabled person and introduced duty-free goods for disabled
individuals. Some taxpayers may also qualify for a federal refundable medical
expense supplement of up to $1,089. The actual supplement amount would be
the lesser of: $1,089; or 25 per cent of attendant-care expenses claimed under
the disability supports deduction (see below), plus 25 per cent of allowable
expenses claimed under the medical-expense tax credit.
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Other Points Related to Disability and Medical Expenses
Use of the disability tax credit on the tax return of a deceased individual may still
be applicable in the year of death if a medical doctor certified before death that
the individual had a "severe and prolonged mental or physical impairment" which
was reasonably expected to last for at least 12 months.
The CRA ruled in April 2003 that for the 2002 and subsequent taxation years,
seniors who are living in a retirement home, and who also qualify for the DTC,
may claim attendant-care expenses of up to $10,000 per year (their estate may
claim $20,000 for the year of death).
The attendant-care component of fees paid to a retirement home includes the
salary and wages paid to employees with respect to the following services
provided to a senior, including:

Health care;

Meal preparation;

Housekeeping in the residents personal living space;

Laundry for the residents personal items;

A transportation driver; and

Security, where applicable.
The retirement home must provide the taxpayer or his/her caregivers with a
receipt showing the applicable amounts paid for attendant care.
The attendant-care change may also apply to taxation years prior to 2002 if a
Notice of Objection ruling is still outstanding or can still be filed.
Generally, expenses paid to a nursing home qualify as tax-deductible medical
expenses, while those paid to a personal-care institution do not, because the
care provided to patients in a nursing home tends to be more extensive.
However, there may be exceptions to that rule.
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All or part of the remuneration paid to a personal care facility might, for instance,
be deductible in situations where an individual with a severe and prolonged
impairment requires specialized equipment, facilities or personnel.
Tuition, Education and Textbook amounts (full time and part time)
Tuition Credit
This credit essentially gives you a non-refundable tax credit for all tuition fees
paid during the year.
To qualify, the fees have to be paid to a university, college, or other designated
educational institution in Canada offering post-secondary level courses.
Fees paid to foreign institutions may also qualify.
In addition, students that are 16 or older by the end of a given tax year can claim
fees over $100 for courses taken to acquire or improve occupational skills. In this
case, the institution must be certified by Human Resources Development
Canada.
It's important to claim all the costs that you can. Remember that tuition fees
aren't restricted to course or other admission fees.
Also included are:

Examination fees

Application fees

Library and lab charges

Charges for certificate and diplomas

Academic fees

Mandatory computer services fees

The cost of books that are included in the total fees for a correspondence
course

Mandatory fees for athletic, health and other services
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
Although sometimes compulsory, the following amounts do not qualify as
tuition:

Student association fees

Fees for property to be acquired by the student (for example, equipment or
supplies)

Textbooks other than those for correspondence courses
It's not uncommon for parents to pay some or all of their child's tuition. And in
many cases, the students themselves don't have enough income - and therefore
a high enough tax bill - to take advantage of the tuition credit. If this situation
applies to your family, don't worry, you can still make the tuition credit pay for
you.
First, it doesn't matter whose name is on the tuition cheque. The student can and in fact must - use the credit if their income is high enough for the credit to
lower their tax bill. If not, there are two options.
Any unused credit can be transferred to a parent, grandparent, spouse, or
common-law partner and used by them to reduce their own tax bill, regardless of
whether they actually contributed any money towards the student's tuition or not.
The second option - available since 1997 - is for the student to simply carry
forward the credit - or any unused portion - and claim it in a future year.
In addition to the tuition credit, students can also transfer an unused education
credit. There are a couple of important restrictions to keep an eye on, though.
A student can only transfer up to a maximum of $5,000 of tuition and education
amounts combined. Second, if a student carries forward unused tuition or
education amounts, they can't then be transferred to family members. Any
amount carried forward has to be claimed by the student in the earliest possible
year the credit(s) can be used.
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The Education Credit
Also referred to as the education amount, this credit is different from - and in
addition to - the credit for tuition. It's also independent of the actual cost of tuition
and other education-related expenses.
To arrive at your family's tax savings, just add the appropriate amounts as
detailed below. The federal credit is 15% of the amount you can claim for the
year.
The rules:
A student can claim $465 (combined education and textbook amount) for each
month (or part of a month) in the year that they were enrolled full-time in a
qualifying education program. Students enrolled in a part-time program can
claim $140 for each month or part-month. Like the tuition credit, any unused
education credit can be transferred to and used by a parent, grandparent,
spouse, or common-law partner, subject to prescribed limits.
The maximum a student can transfer in any given year is $5,000 of tuition and
education amounts combined, less the amount they themselves claim. So what is
the education credit worth?
Both the tuition fee credit and the education credit are claimed on a calendaryear basis. All claims for tuition fee credits must be supported by formal receipts.
Claims for the $465 per month education credit must be supported by form
T2202 or T2202A, which is completed by the educational institution you attend.
Currently, you do not have to file these supporting documents with your return,
but they must be available if requested by the tax department.
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Income from scholarships and awards
Starting with the 2006 taxation year, scholarship, bursary and fellowship income
is fully exempt from tax when the income is received in connection with a
program for which the student will get an education tax credit. The income is not
reported on the tax return.
If you are not eligible to claim the education amount, then only the first $500 of
awards is tax free. Amounts received in excess of $500 are reported on line 130
of your tax return.
Transfers
If you cannot fully utilize your tuition and education tax credits to reduce taxes
payable to zero, all or a portion of the unused credits may be transferred to a
spouse or supporting parent or grandparent.
Should a student be unable to use all or a portion of a credit, he or she can
transfer it to an eligible person up to a $5,000 maximum amount. That translates
into an $800 federal tax credit.
All of the provinces have similar provisions (although, in some cases, the amount
available for transfer can exceed $5,000). To make this designation, the student
must complete and sign form T2202. A copy of the signed form should be kept
by the designated person and if applicable, by the student to support the amount
claimed.
Prior to 1997, tax credits earned for tuition fees and the education amount were
lost if not used by the student or a person to whom they can be transferred.
Beginning with credits earned in 1997, students are entitled to carry forward
indefinitely unused tuition and education credits. This will enable students to
utilize the credit when they have sufficient income.
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Any amount not used in the current year by the student and not transferred to an
eligible person will be automatically available to carry forward. The transfer of
credits to an eligible person is only available for credits earned in the current
year. Amounts carried forward can only be claimed by the student.
Student loan interest
A non-refundable tax credit for student loan interest can only be claimed by the
student, even if it was paid by another person. Unused interest amounts can be
carried forward for 5 years.
In order for the interest to be eligible, the loan must have been obtained under:

the Canada Student Loans Act,

the Canada Student Financial Assistance Act, or

a similar provincial or territorial government law for post-secondary education
If an eligible loan is refinanced, it will lose its eligibility for the tax credit, unless
the refinancing is done under the above-mentioned legislation. There are both
federal and provincial non-refundable tax credits for student loan interest. The
tax credit is calculated by multiplying the lowest federal/provincial/territorial tax
rate by the amount of the loan interest, except in Québec, where the rate of 20%
is used.
If you do not need to claim the student loan interest because your taxes are
already zero, save it to claim in a future year.
Thankfully, the credit doesn't go to waste if, as is often the case, the student
doesn't have sufficient income to take advantage of it right out of school. The
credit for the interest paid in any given year can be carried forward and used to
reduce the student's tax bill in any of the next five years. And you don't have to
take an extra course in loan amortization in order to figure out the amount of the
claim...the lending institution should summarize the student's interest charges
each year.
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Pension Credit
A 15 per cent federal tax credit and provincial/territorial tax credits at the lowest
taxation rates in each jurisdiction on up to $2,000 of eligible pension income is
available to qualified individuals. The pension income tax credit is available to
those 55 or older. It enables you to deduct, from taxes payable, a tax credit equal
to the lesser of your pension income or $2,000. Depending on which province
you live in, this will fluctuate because of the different Provincial percentages.
The pension income tax credit is non-refundable and cannot be carried forward
each year. To claim the credit, you must be in receipt of certain specified
income. The definitions of "pension income" are therefore important.
What is eligible pension income?
Eligible pension income depends on your age. If you are 65 or older for the entire
year, pension income includes:

Income from a superannuation or pension fund

Annuity income out of a Registered Retirement Savings Plan (RRSP) or a
Deferred Profit Sharing Plan (DPSP)

Income from a Registered Retirement Income Fund (RRIF)

Interest from a prescribed non-registered annuity

Income from foreign pensions

Interest from a non-registered Guaranteed Investment Certificate (GIC)
offered by a life insurance company.
If you are younger than 65 for the entire year, pension income includes:

Income from a superannuation or pension plan

Annuity income arising from the death of your spouse under an RRSP, RRIF
or DPSP.
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What is not eligible pension income?

Investment income from market-based investments

Interest income from GICs with banks, trust companies and credit unions

Old Age Security (OAS) and Canada Pension Plan (CPP), retiring allowances

Lump sum death benefits, Lump sum withdrawals from RRSP
Tax planning strategies involving the pension income tax credit
If you are over the age of 65 and you are not part of a superannuation or pension
plan, take a look at line 314 of your tax return to see if you are taking advantage
of the pension income tax credit. If not, consider one of these tax savings
strategies; you may be able to create qualified pension income to save taxes.
Transfer RRSP to a RRIF
At age 65 transfer $5,000 to a RRIF and take $2,000 out per year from ages 65
through 69 (inclusive). This essentially allows you to get $2,000 out of your
RRSP tax free for five years. Whether you need the income or not, it is an
opportunity you don't want to miss.
Transfer LIRA to a LIF and then annuitize
In most cases, you can transfer your Locked-in Retirement Account (LIRA) to a
Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF) once you
reach the age of 55.
To make the most of this strategy, you must transfer the LIRA to the LIF and then
to an annuity for the income to be reported as eligible pension income. If you
purchase the annuity directly from the LIRA, the annuity is considered a RRSP
annuity, which only qualifies for the pension income credit after age 65.
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Buy a GIC from a life insurance company
If you do not have any qualifying pension income, are age 65 or older, and do not
want to draw down your registered assets at this time, consider buying a GIC
through a life insurance company. It's an easy way to make a GIC qualify for the
pension income tax credit, because interest from such a GIC is considered
eligible pension income. To determine how much principal you need to claim the
full credit, divide $2,000 by the applicable interest rate for the term you want. For
example if you want a five-year term and the current annual rate is 4.0%, you
must invest $50,000 ($2,000 divided by 4.0%= $50,000).
Transfer of unused credit to a spouse
Unused pension income credit is transferable to a spouse or common-law
partner. This option should be explored in circumstances where one spouse is
earning pension income in excess of $2,000 and the other spouse is not
otherwise fully using their pension income tax credit.
Goods and Services Tax (GST/HST) Credit
Generally, Canadian residents age 19 or older are eligible to receive the
GST/HST credit, which is paid quarterly to eligible recipients. Those under 19
may be eligible, if they have a spouse or common-law partner, or if they are a
parent and they reside with their child.
To apply for the GST/HST credit, you must file a personal income tax
return. Simply tick the GST/HST credit check box on the first page of your
return. If you have a spouse, your tax return must provide information on your
spouse's social insurance number, first name, and net income amount (even if it
is zero).
If you are 18 years of age or older, you should file a tax return even if you have
no income, in order to apply for the GST credit.
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You must be 19 to receive the credit, but if you will turn 19 before April 1 of the
following year, you should apply now so that you will receive your first GST
payment as soon as possible after you turn 19. Some provinces have benefits
similar to the GST credit. By filing your tax return, you are applying for these
benefits. The GST credit and supplement are fully indexed for inflation on an
annual basis every July 1. Only one spouse or common-law partner can claim
the GST credit on behalf of both spouses and any dependants. GST credits are
paid separately, on a quarterly basis, in July, October, January and April. When
the total credit is less than $100, only one annual payment is made, during July.
Approximately 3 million Canadians received a total of roughly 1 billion in
GST/HST credits in 2011.
Political Contribution Tax Credit
The section of the Income Tax Act s. 127(3) covers this tax credit.
If you contributed to a registered federal political party or to a candidate for
election to the House of Commons, you will get a tax credit which is deducted
from your federal tax payable.
A federal contribution can be claimed by either spouse, but one contribution
receipt cannot be split between spouses. If you have a spouse and want to
contribute more than $400 in one year, it would be beneficial to make two
separate contributions, for greater flexibility in maximizing the tax credit.
There is no federal tax credit for contributions exceeding $1,275.
Credit %
Credit $
Credit on first $400
75%
$300
Credit on > $400 to
$750
50%
$175
Credit on > $750 to
$1,275
33.33%
$175
Maximum Credit
$650
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Provincial and territorial political contributions
If you contributed to a political party registered in your province or territory, or to
a candidate seeking election to the Legislative Assembly of your province or
territory, you will get a tax credit which is deducted from your provincial or
territorial tax payable.
In British Columbia and Ontario, a contribution can be claimed by either spouse
(or common-law partner), but one contribution receipt cannot be split between
spouses.
In any other province or territory, a contribution receipt can be used by either
spouse only if it is in the name of both spouses.
The biggest percentage tax credit is received on the first level of contribution,
with a lower percentage credit for each subsequent level (except in Quebec).
For more information, and to see the tax credit amounts for your province or
territory, go to the CRA web page General Income Tax and Benefit Package.
Choose your province, and then choose the link to the information sheet for
completing forms for your province or territory.
If you have a spouse or common-law partner, make two separate contributions
and get both receipts in the names of both spouses, for greater flexibility in
maximizing the tax credit.
Foreign non-business income tax and foreign tax credit
The section of the Income Tax Act s. 20(11), 20(12), s. 126(1), s. 126(9) covers
this tax credit.
Canadian residents are taxable in Canada on world income from all sources.
Income from foreign jurisdictions may also be subject to tax in the foreign
jurisdiction.
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Canadian residents who have had withholding taxes deducted from foreign nonbusiness income may claim a foreign tax credit. This should not be confused
with the separate calculation for a foreign tax credit for business income.
The calculation of this non-refundable tax credit is probably not automatically
done by your tax software, if you have foreign non-business income (such as a
capital gain) which is not reported on a T-slip. These amounts will probably have
to be manually typed into a worksheet in the software.
If an individual has anything more than foreign capital gains and withholding
taxes from foreign dividends, the foreign tax credit can be a complex calculation.
It becomes more complex when the individual wants to deduct a portion of the
foreign tax from income as well as using the foreign tax credit, because the
portion deducted from income must be excluded from the foreign taxes in the tax
credit calculation. A detailed description of the foreign tax credit calculation can
be found in CRA's IT-270, Foreign Tax Credit.
The foreign non-business tax credit is calculated separately for each foreign
country. However, if the total foreign taxes are less than $200, CRA will usually
allow a single calculation. When the tax credit has to be calculated separately for
more than one country, the tax return is no longer eligible for NetFile.
The calculation for the tax credit uses the total foreign non-business income,
such as pension income, employment income, director's fees, commissions,
interest, dividends, and taxable capital gains in excess of allowable capital
losses. Capital gains and losses on publicly traded securities are generally
considered foreign income if the securities were traded on a foreign stock
exchange. Foreign non-business income is not reduced by net capital losses
carried forward from a previous year.
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When foreign property income (other than from real property) has had
withholding tax in excess of 15% deducted, the excess can be deducted from
income on line 232 of the personal tax return, "Other deductions", as a s. 20(11)
deduction. Only the 15% tax amount is included in calculating the foreign tax
credit, and the excess reduces the amount of foreign non-business income.
If the federal foreign tax credit is less than the foreign tax you paid, you may also
be able to claim a provincial or territorial tax credit. For territories, and provinces
other than Quebec, form T2036 Provincial Foreign Tax Credit is used.
The foreign taxes are often not completely recovered by the foreign tax
credits. Non-business foreign taxes which are not recovered as a tax credit may
be deducted from income on line 232 of the personal tax return, "Other
deductions", as a s. 20(12) deduction.
When this is done, the foreign tax credit calculation is then revised, by reducing
both foreign non-business income and foreign tax paid by the amount of foreign
tax deducted on line 232.
See the following CRA Interpretation Bulletins for more information:

IT-270, Foreign Tax Credit

IT-395, Foreign Tax Credit - Foreign Source Capital Gains and Losses

IT-506, Foreign Income Taxes as a Deduction from Income
Overseas Employment Tax Credit (OETC)
A Canadian resident who performs substantially all employment duties outside of
Canada in the course of a taxation year while an employee of a specified
employer to whom he/she is at arm's length (also usually a resident of Canada),
or sub-contractor thereof, may qualify for the Overseas Employment Tax Credit
(OETC).
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To qualify, the CRA specifies that the taxpayer must work overseas for at least
six consecutive months either in one calendar year, or overlapping the previous
or next year; however, a 2002 court decision (Rooke) also ruled that as long as
the taxpayer performed all or substantially all of the work outside Canada over
the course of a particular taxation year, he/she would be entitled to the
deduction. Check with your certified general accountant if you have any
questions about your status in that regard.
All or substantially all generally refers to at least 90 per cent of the employee's
income being derived from eligible activities during the qualifying period for the
OETC. Moreover, during this period the taxpayer can still take leave for vacation
time and other activities, such as returning to Canada to meet with the employer
and/or work briefly here, without prejudicing his/her status in terms of qualifying
for the OETC provided he/she continues to perform a substantial amount of
his/her employment duties outside Canada.
This credit potentially shelters from tax up to 80 per cent of their overseas
employment income including salary, wages, and other remuneration like
gratuities, taxable benefits and stock options, netted off by a reasonable
proportion of allowable employment deductions, to a maximum of $100,000.
An individual who would otherwise be employed by a foreign company but
instead incorporates a Canadian company, which in turn contracts with the
foreign company to provide services, cannot claim this amount. This credit is also
disallowed if the Canadian company does not employ more than five full-time
employees and the taxpayer is a specified shareholder, or is related to a
specified shareholder, who owns at least 10 per cent of the shares together with
non-arm's length parties of the business.
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An amendment to this provision of the Income Tax Act has been proposed
whereby at least 10 per cent of the qualified employer's shares, or the value of
any partnership interests, must be held by persons resident in Canada.
Specified employers must carry on business in the same country where
employees, including professional, administrative, and other support staff
perform their duties. Such jobs are generally held in connection with an overseas
natural resource, construction, installation, agriculture, or engineering project.
The CRA also recognizes the Government of Canada as a specified
employer. Therefore, federal government employees might qualify for the OETC
if employed overseas as the result of a government contract, although services
provided under a prescribed international development assistance program by
the federal government are excluded.
Income used by the taxpayer to calculate their OETC may not be used in the
calculation of their foreign tax credit.
Scientific Research and Experimental Development Tax Credit (SR&ED)
Generous tax incentives exist to encourage investment in research and
development (R&D) activities. A scientific research and experimental
development investment tax credit (SR&ED ITC) is, for instance, available on
qualified capital and current expenditures. This SR&ED ITC can reduce tax
payable and/or result in a cash refund.
Canadian-controlled private corporations may be eligible for SR&ED ITCs at a
rate of 35 per cent on the first $2 million of annual eligible expenditures and 20
per cent thereafter. Other Canadian companies, along with individuals, are
eligible for SR&ED ITCs at a rate of 20 per cent. SR&ED ITC eligible activities
must be business-related and carried on in Canada; this could also include areas
considered part of the country’s exclusive economic zone, including its airspace,
seabed or subsoil.
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Canadian companies who take part in SR&ED joint projects with foreign
participants may still be eligible for an ITC, even if their project is primarily
directed from outside Canada or a majority of the project's expenditures are
incurred outside Canada, provided the SR&ED activities themselves are carried
on in Canada.
Qualified SR&ED expenditures might need to be reduced if the claimant received
direct reimbursement of related costs or expenses through various means, such
as a contract payment or government/non-government assistance.
The SR&ED ITC requires much supporting documentation and the CRA imposes
elaborate review procedures to verify claims. Although there are no clear
guidelines within existing tax legislation to indicate exactly what documentation or
how much is required, the tax courts tend to favour a meticulous detailing of
various steps, results and conclusions to prove a scientific advancement has
taken place or the resolution of a scientific uncertainty has occurred.
The CRA has released guidelines for software developers, entitled "Eligibility of
Software Projects for the SR&ED Tax Credits and Developing and Documenting
Claims." These provide guidance in a number of related topic areas, discussing
issues such as being able to prove that a technological advancement has taken
place and how to demonstrate and document that a technological uncertainty has
been resolved.
The Agency has also released two application policy papers, entitled
"Multinational Clinical Trials" and "Eligibility of Clinical Research in the
Pharmaceutical Industry" to provide guidelines for individuals in the life sciences
fields, including the pharmaceutical and biopharmaceutical industries and the
medical research community, who are interested in claiming SR&ED benefits.
In certain cases, the tax courts have also relied on expert testimony to prove that
a verifiable claim exists.
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The CRA and Agri-Food Canada have a joint initiative that provides farm
producers who make financial contributions through agricultural organizations
they belong to with greater access to investment tax credits through the SR&ED
program. In late 2005, the Department of Finance (DOF) announced that stock
option benefits, unlike salary, could not be considered eligible SR&ED
expenditures for the purposes of acquiring an ITCin contrast to an earlier tax
court ruling. The DOF said that deductions would be limited to the amount
actually disbursed, and that such claims had to be made within a 12-month
period starting on the date the corporate tax return is due (which is six months
after the corporate year end, effectively providing an 18-month window).
About the Tax Credit for Public Transit Passes
Find out more about the federal income tax credit for weekly or longer duration
transit passes and how the Government of Canada is encouraging the use of
public transit to reduce air pollution and greenhouse gas emissions.
On July 1, 2006, the Government of Canada launched its program to offer
individual Canadians a non-refundable tax credit to help cover the cost of weekly
or longer duration public transit passes. Because it is a non-refundable tax credit,
anyone who applies does not receive the money in the form of a refund. Instead,
the amount claimed is multiplied by the lowest personal income tax rate for the
year and then is deducted from the amount of tax owed for that year.
If a monthly transit pass costs $100, the amount the individual can claim in 2011
would be $1,200, resulting in a tax credit of $180.00 (twelve months multiplied by
15%).
Visit the Canada Revenue Agency website for additional information about how
to qualify and claim the tax credit for your transit pass.
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Why is the government giving a tax credit for transit passes?
Canadians are concerned about traffic congestion and the harmful greenhouse
gas emissions that come with it. Increasing the use of public transit, including
buses, subways, commuter trains and ferries, will help ease traffic congestion in
our urban areas and reduce air pollution that dirties our air and affects our health.
The tax credit for public transit passes makes public transit more affordable for
Canadians and provides clean air in our communities.
Encouraging greater use of public transit is one element of the Government of
Canada's environmental agenda to reduce greenhouse gas emissions and
promote clean air.
Foreign Content and RRSPs
The 2005 reworking of the foreign content restrictions on RRSPs, pension funds
and other deferred income plans was an important change, especially for
taxpayers who have RRSPs as well as investments outside of RRSPs.
It is best to have the investments that attract the highest tax rates inside an
RRSP, and those that attract the lowest tax rate outside the RRSP. The highest
tax rates are paid on interest and foreign dividends. There is no dividend tax
credit on foreign dividends, so they are taxed the same as interest. Another
good reason for having foreign stocks inside the RRSP is that no withholding tax
is deducted from most foreign dividends received by an RRSP.
The lowest tax rates are paid on Canadian dividends and capital gains.
Canadian dividends are eligible for the dividend tax credit. Another good reason
for having Canadian stocks outside the RRSP is that all Canadian dividends
received by a couple can be included in the income of either spouse in certain
circumstances.
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If you own the following investments, it is better to hold them inside an
RRSP:
Interest-producing investments such as:

cash

treasury bills (T-bills)

bankers' acceptances

certificates of deposits (CDs)

guaranteed investment certificates (GICs)

bonds

foreign stocks which pay dividends
If you own the following investments, it is better to hold them outside an RRSP:

Canadian stocks which pay dividends

foreign stocks which pay little or no dividends
If you plan to rearrange your investments to be more tax-efficient, make sure you
don't transfer investments into an RRSP without knowing the tax consequences.
When investments are transferred into an RRSP, there is a deemed disposal.
Any resulting capital gains are included in income. Any resulting capital loss will
be deemed to be a superficial loss, and cannot be deducted.
Qualified RRSP Investments
It is proposed to add investment-grade gold and silver bullion, coins, bars, and
certificates on such investments to the list of qualified RRSP investments. These
must be acquired either from the producer of the investment or from a regulated
financial institution. This change is effective for investments made on or after
February 23, 2005.
Adoption expense tax credit
For 2005 and following years, a new 15% non-refundable tax credit for eligible
(non-reimbursable) child adoption expenses.
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The maximum credit will be 15% of whichever of the following amounts is less:

$11,474 for 2012, but will be indexed yearly; or

The total of eligible adoption expenses incurred during the adoption period.
The credit can be claimed only in the year in which the adoption is finalized
(When an adoption order is issued or recognized by a government in Canada).
Eligible adoption expenses will include:

Fees paid to an adoption agency licensed by a provincial or territorial
government; court costs and legal and administrative expenses;

Travel and living expenses of the child and the adoptive parents;

Document translation fees; mandatory fees paid to a foreign institution; and

Any other reasonable expenses required by a provincial or territorial
government or an adoption agency.
The adoption period begins at whichever occurs earlier:

The time the child's adoption file is opened with a provincial or territorial
ministry responsible for adoption or with an adoption agency; or

The time an application related to the adoption is made to a Canadian court.
INCOME TAX & LIFE INSURANCE
All of the insurance sold today is “exempt” from annual accrual taxation.
Therefore, you only potentially have taxable income (i.e. a policy gain) when
money is physically taken out of the policy (or ownership transferred).
The taxable element of a policy is the difference between the cash surrender
value and the adjusted cost basis (ACB).
Life Insurance Companies issue contracts for Life Insurance, Annuities and
Variable Contracts, all of which are referred to and taxed as Life Insurance
Policies. (Some minor variations apply).
Some policies (non-exempt life policies and annuities) are taxed on an accrual
basis and exempt Life Policies are taxed at disposal.
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Some can change from exempt to non-exempt and be taxed accordingly.
Policies issued before December 2, 1982 are grandfathered.
The death benefit of a life insurance policy is not taxable. However, if a policy
has been registered as a RRSP or is non-exempt, special consideration of the
death benefit vs. the taxable portion of the CSV should be noted. Since only
policies containing CSV attract taxation (Term Insurance is not included).
A tax calculation takes place at the disposition of a policy and the calculation is
the same regardless of whether the policy is exempt or non-exempt. The only
thing that changes is the timing.
Ownership – Who owns the policy (Individual or Corporate)?
There are differences between the rules for the interest in life insurance policies,
which are held by individuals or non-individuals.
Non-individuals can include interests that are held by corporations, partnerships,
unit trusts, and any trust of which a corporation or partnership is a beneficiary.
Exemption Test Policy
An exemption test policy (ETP) is a mock life insurance policy that is used to
determine if a certain life insurance policy satisfies the exemption rule. This
policy comes into effect the day the real policy is issued.
An additional ETP is deemed to be issued on each policy anniversary where the
policy’s benefit on death has increased by more than 8% over the previous year.
If this is the case, then the benefit on death of the original ETP is increased by
8% and any excess becomes the benefit on death of the second ETP.
In the event where another increase occurs in a subsequent year, the original
ETP is increased again by 8% and the excess is put towards a third ETP. The
sum of these benefits on death is always equal to the benefit on death of the real
policy.
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If the policy fails to meet the 250% (anti-dump in rule), the issue date can be
changed to a later date. This particular test is applied at the tenth and every
policy anniversary thereafter. If the accumulating fund at that time is greater than
250% of the accumulating fund on the third preceding anniversary, the issue date
of any earlier ETPs will be changed to that third preceding anniversary. This is
done without regard to any policy loan.
An exemption test policy matures as an endowment at the later of:
Ten years after the date of its issue, and age 85 of the life insured.
Because this is an endowment, the ETP has an accumulating fund at maturity
equal to the benefit on death.
When the ETP is issued at or later than age 65, the accumulating fund for the
years before the maturity is the appropriate fraction of the maturity value.
When the ETP is issued before age 65, and has been in force for at least 20
years, the accumulating fund is equal to the accumulating fund of a paid-up
endowment at age 85 policies.
The accumulating fund value of the ETP will be based on the mortality and
interest rates used by the insurer in determining the premiums for the real policy.
The minimum interest rate used for the ETP is:

3 percent for all policies issued before May 1, 1985.

4 per cent for all policies issued after April 30, 1985.
Exempt Policies
These policies are considered to be designed primarily to provide life insurance
and annuity options and as such are taxed at disposal. An exempt policy is one
that satisfies a prescribed exemption test.
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To be an exempt policy, the life insurance policy must not only meet the tests at
each policy anniversary, but must also be expected to continue to meet the test
on each future anniversary date, based on some reasonable assumptions for all
factors.
Any policy that has been issued after December 2, 1982 has to only be tested for
exemption in some situations.
Non-exempt Policies
These policies are considered to be or have become policies whose primary
purpose is investment. They are measured against a model, which is a 20-pay
endowment at age 85. When the CSV growth exceeds the CSV growth of the
model, the gain becomes taxable (accrual method) and each subsequent gain
must be calculated on the policy anniversary.
At disposal, if the proceeds are less than the ACB the taxpayer can deduct the
lesser of the difference or the total of the amounts previously reported as an
accrual income.
At death, the amount of gain accruing since the last reporting date must be
prepared and the tax paid. The death benefit (sum insured) is received tax-free.
A non-exempt policy is a policy that has failed the exemption test. Non-exempt,
non-RRSP annuities and investment contracts are taxed annually on accrued
income (earned, but not taken).
Accrual taxation was introduced on December 2, 1982 and these policies could
be taxed on an annual or tri-annual basis. After 1989, annual taxation became
mandatory. Insurance companies must report taxable income, by way of tax
information slips.
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The following seven situations can be considered areas for tax considerations:
1. Policy dispositions. / Cash surrender value
2. Dividend options and interest earned.
3. Policy loans.
4. Policy changes.
5. Policy proceeds at death (non-exempt policies).
6. Deductibility of premiums.
7. Interest.
1. DISPOSITION OF A POLICY / CASH SURRENDER VALUE
The disposition of an interest in a life insurance policy is defined under
paragraphs 148(9)(c) and (e) and subsections 148 (2) and (7) under the Income
Tax Act. Life insurance policies produce a taxable gain when the adjusted cost
basis (ACB) is in excess of the proceeds at disposition. The proceeds of
disposition do not include dividends left on deposit or interest earned. It
represents the growth from when a policy was “last acquired” until it is disposed
of.
When Does Taxation of a Life Insurance Policy Occur?

An exempt policy – when disposed of.

A non-exempt policy (investment contract) – when it fails the exemption test.
Note: Paid up additions increase the total CSV, which may affect the exemption
test adversely, other dividend options do not.
The Calculation
Premiums Paid
Less Dividends Paid
$12,000
- 4,000
ACB (Adjusted Cost Basis) $ 8,000
Proceeds (CSV)
Less ACB
Taxable Gain
$18,000
- 8,000
$10,000
Note: Taxable gain is then added to your earned income and taxed at your
personal rate.
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Additional terms that need to be defined:
Last acquired:

When purchased

When re-instated

When annuitized

If absolutely assigned, when acquired again
Disposed of:

Surrendered for CSV

Lapse

Annuitized (Post December 2, 1982)

Policy loans (partial disposal)

Absolute assignments

Declaration of dividends (used to purchase paid-up additions)

Change in policy status from exempt to non-exempt

Act of Law (fraud, voiding the contract)
Not included are:

Collateral loan assignments

Policy not considered to have lapsed (disposed of) if reinstated within 60 days
after the end of the lapse year.

Proceeds at death, for a policy last acquired, before December 2, 1982 or an
exempt policy.

Certain policy changes.
Taxation Occurs:

Policy loans are considered partial dispositions, after March 31, 1978.

If repaid a deduction entitled for the lesser of the repayment or previous
taxable gain caused by the loan.
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Proceeds Not Taxed are:

Disability rider monthly income payments.

When the face amount is paid out because of disability.
Adjusted Cost Basis (ACB)
The adjusted cost basis is the base value from which accrued income and policy
gains are measured. The ACB changes with each transaction in respect of the
policy. Some transactions increase the ACB, while some reduce it.
Since the ACB is the excess of many factors that increase it over the factors that
reduce it, it cannot become negative.
Where a term insurance policy has been converted, the factors used in
calculating the ACB of the original policy will continue to be applied.
In simple terms, ACB is premiums paid less dividend earned.
Since this deals with taxation, nothing is simple, so there are certain variations on
the theme. It is easier to understand if we remember that as the ACB becomes
greater, the taxable gain became smaller and vice versa.
Formula:
Taxable Gain = Proceeds – ACB
Terminology
Exempt policy model:
20-pay endowment at age 85
Prescribed exemption test:
Does policy CSV accumulate faster or
slower than the CSV of a 20-pay
endowment at age 85
Exempt policy:
A policy that passes the prescribed
exemption test
Non-exempt policy:
A policy that fails the prescribed
exemption test
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Date policy taxation changed from “old
December 2, 1982:
status” to “new status”. Policies are
either “old” policies issued before
December 2, 1982 or “new” policies
issued after that date.
Policy factors that can increase the ACB:

Gross premiums

Dividends used to purchase paid up additions or 1 year term insurance

Non-deductible loan interest

Policy gains required to be included in income

Policy loan repayments

Old policy – excess of ACB or CSV on the 1st anniversary after March 31,
1977

Non-exempt – any accrued income previously reported
Policy factors that can decrease the ACB:

Proceeds of disposition previously received (including loans taken after March
31, 1978 and amount of dividends credited.

Old policy – outstanding loans as of March 31, 1978.

New insurance – net cost of pure insurance (equal to 1 year term insurance)
for years commencing after May 31, 1985
After May 31, 1985 – premiums for riders are excluded from ACB calculation.
It should be noted that the following are excluded from disposition:

Policy assigned as collateral for a loan.

Lapse of a policy by non-payment of premiums, if policy is reinstated not later
than 60 days after year of lapse.

Proceeds at death, of a policy last acquired before December 2, 1982 (now
considered non-exempt) or an exempt policy.

Certain policy changes.

Policy loans (after March 31, 1978) are considered a partial disposition.
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Repayment of a loan will result in a deduction, which is the lesser of:

The repayment OR

Any previous taxable gain caused by the loan.
Supplemental benefits (rider premiums) are excluded from ACB calculations from
exempt and non-exempt policies, after May 31, 1985.
Simple way to calculate ACB

Take the basic premium (basic policy cost plus any term riders).
ADD:

Any dividends applied to purchase paid-up additions.

Interest paid on policy loans (provided it has not been deducted for any tax
purposes)

Policy gains included in income (Accumulating dividends, policy loans etc.)

Accrued income reported (non-exempt policies)
DEDUCT:

Proceeds of disposition (Dividends and policy loans are considered proceeds
of disposition.

Net cost of pure insurance (COI)
Definition of Net Cost of Pure Insurance
Calculated by the Insurance Company according to Regulation 308 of the
Income Tax Act.
COI = Mortality Factor x Amount at Risk.
Mortality factor is set out as minimum standard in Commissioners 1958 Standard
Ordinary Mortality Table. Some companies will use their own tables.
Amount at risk is calculated as the death benefit minus the cash surrender value.
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Definition of Dispositions.
Some dispositions are tax-free until the ACB is gone. In other words, you can
get the remainder of what you “paid in” first.
This can include:

Cash and accumulated dividends.

Increasing Income payouts if the policy is set up that way.

Policy loans.
Some dispositions require the entire taxable policy gain to be brought into
income in that year.
These situations could be:

Full surrender.

Annuitization (taxed like surrender).

Transfer of ownership (under certain circumstances).

Maturity of an endowment product.
Some dispositions require each dollar received to be partly gained and partly a
return of ACB (what you paid in) – proportionate disposition. This could include
partial surrenders.
Where dividends are channelled back into the policy to pay premiums (premium
offset) or to buy additional insurance (Paid-up additions), there is no disposition.
It is as though no money has ever left the policy. The tax-free portion of your
policy, which is like a return of the money you paid in, increases and then
declines to zero. Why?
The reasons:
It is a function of level premium concept. Eventually the pure cost of insurance is
greater than the premium paid. This can cause the ACB to decline. Any new
premium will increase the ACB, while the increase in COI will drive the ACB
down.
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If you think of insurance as having a saving and a pure protection component,
then it makes sense that not all the premium is taxable to the savings
component. Each year an increasing amount is allocable to the protection
component (COI).
Eventually the COI is more than the premium
What this means is that your premiums are “used up” to provide the annual cost
of protection. The residual cash surrender value has no real cost attached to it
once premiums have been used up and becomes fully taxable.
Total cash value and Adjusted Cost Basis (ACB)
Eventually all cash value will become taxable (because the ACB is zero).
Although it is dangerous and unwarranted to compare exempt insurance to an
RRSP, a simple analogy to illustrate a point here is worthwhile.
When ignoring the COI, you should expect most of the policy cash value to be
taxable in the end. With insurance, the deposits are ultimately allocable to COI
rather than cash value. So, all of the CSV becomes taxable eventually.
The message here is that we must be telling our client’s and prospects about the
exempt cash value growth in insurance – still a good deal! This is a further way
of enhancing the client’s portfolio that has already taken advantage of any other
tax deferral products.
Total Premiums Paid and Adjusted Cost Basis (ACB)
The following table shows:
Level premium – high early premium builds reserves to cover high COI costs in
later years. If ACB is total premiums minus total COI’s, then you can see why
ACB declines by about age 65 (when COI begins to exceed premium).
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COI VERSUS PREMIUM
YEAR
AGE
PARTICIPATIN
G W/L
PREMIUM
COI
1
40
$2,442
70
5
45
$2,442
136
10
50
$2,442
305
20
60
$2,442
1,390
30
70
$2,442
4,147
40
80
$2,442
7,041
Male, Age 40, Non-Smoker, Whole Life $100,000, PUA
TAXABLE PORTION OF CASH SURRENDER VALUE
Rough Estimate of Percentage of Cash Value Taxable
Jubilee Whole Life
20 Pay Life
Years from
issue
Paid Up
Additions
Early Offset
Option
Paid Up
Additions
Early Offset
Option
10
10%
10%
30%
30%
20
50%
65%
60%
75%
30
80%
100%
90%
100%
40
100%
100%
100%
100%
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Notes to above table
These figures are rough rules of thumb. The results may vary somewhat by age
at issue. Roughly, 50 – 60% will become taxable after 20 years and the total
amount will be fully taxable after 30 – 40 years.
The key is to understand why this occurs, and a further reason to see why it
makes sense to look at the advantage of tax-exempt cash growth. This
reasoning is used to market Universal Life every day.
Proportionate Dispositions
What if a client only wants $3,000 from a policy that has a $10,000 policy CSV?
How you may want to access the $3,000:
GAIN
($7,000)
ACB
($3,000)
Horizontal Method
Your client could take a horizontal slice and receive a tax-free return of the ACB
(the remaining paid-in amount). Taking a policy loan could do this.
Vertical Method
Your client could take a vertical slice comprised partly of the gain element and
the ACB (70% of each dollar would be taxable). A partial surrender would have
to take place.
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2. DIVIDENDS
Any policy dividend that has been declared, paid or credited by the Insurance
Company is treated as a disposition. The amount of dividend declared reduces
any ACB. If the amount of the dividend exceeds the ACB, the excess becomes
subject to tax. The amount that is included in income is then added back to the
ACB to avoid double taxation.
It is not the dividend, which is taxable, but any interest they earn is taxable.
Dividends are considered to be a return of premiums, CSV of paid-up addition,
purchased by Dividends, is added on to basic policy cash surrender value. If the
dividends left on deposit, only the actual dividend, not the interest earned affects
the ACB. This criterion applies regardless of the manner in which any dividends
are applied.
This would include any dividends:

Taken in cash.

Used to reduce premiums.

Left on deposit.

Used to purchase any paid-up insurance or term insurance.

Any dividends invested in the insurer’s segregated funds.
Example of Dividend Taxable Gain
Dividends Left On Deposit
Proceeds of disposition (CSV)
$12,000
Total contractual premiums paid
$7,000
Less dividends declared
2,000
Adjusted cost basis
5,000
Taxable policy gains
5,000
$7,000
The same policy gain would happen if the dividends had been paid out in cash to
the policy owner, or had been used to pay premiums.
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Dividends Left to Purchase Paid-up Additions
The amount of any dividends declared reduces the ACB as in the example
above. If there were any taxable gain, then the ACB would be increased. When
additional insurance is purchased with any dividends, a further acquisition cost or
premium outlay arises which in turn will increase the ACB by an equal amount.
When the disposition occurs, the cash value of the paid-up additions forms part
of the proceeds of disposition.
Example of PUA Disposition
CSV of policy
$12,000
CSV of paid-up additions
3,500
Proceeds of disposition
13,500
Total contractual premiums paid
$9,000
Premiums for paid-up additions
3,000
12,000
3,000
Less any dividends declared
Adjusted cost basis
9,000
Taxable policy gains
9,000
$3,500
3. POLICY LOANS AND GAINS
A policy loan is considered to be any amount that is advanced by an insurer to a
policyholder under the terms and stipulations of an insurance policy. The mere
taking of a policy loan has no effect on the amount of any income to be reported
on the accrual basis since the amount of the outstanding loan is subtracted when
calculating both the accumulating fund and the ACB.
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Policy loans are considered a partial disposition and can trigger taxable policy
gains:

Automatic Premium Loan is considered to be a loan (ACB is reduced by a
loan)

A taxable gain results if a loan exceeds the ACB. The amount of excess is
added to the ACB of the policy

When the loan is repaid, an amount equal to the taxable gain previously
included in taxable income will be deducted from current taxable income

The amount of the repayment will be restored to the ACB
Policy Loan Interest
Policy Loans always requires interest payment. The interest is tax deductible
only if the loan is used to obtain taxable income producing property (stocks,
bonds, etc.) or to earn income from a business.
If it is tax deductible, it must be reported on a T2210, so that it is not added to the
ACB of the policy. This also applies to variable annuity contracts.
Example of a policy loan and ACB
Policy loan = proceeds of disposition
Less the ACB
$11,000
7,000
Taxable gain under subsection 148(1)
$ 4,000
In order to understand this illustration, any payments of additional premiums and
of any loan interest have been ignored.
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Calculation of the ACB after any repayment of a loan in a subsequent tax year:
ACB prior to taking the loan
$7,000
Reduction in cost basis equal to proceeds of
Disposition to date
(11,000)
Increase in cost basis equal to taxable gain
Repayment of loan principal
4,000
$11,000
Increase in cost basis through repayment
ACB
4,000
$7,000
$7,000
4. POLICY CHANGES
Policy changes can result in a taxable or non-taxable disposition. It can also
result in a change in policy status, from exempt to non-exempt under the
following conditions:

Extended term option – no disposition

Reduced paid-up insurance – an exempt policy would not be considered to be
disposed of if premiums were paid more than 20 years.

Before 20 years could result in non-exempt status.

No disposition occurs if the change in plan is a contractual right.

If a policy fails the exemption test, it becomes non-exempt regardless.
5. TAXATION AT DEATH
Exempt Policy

Proceeds are non-taxable.
Non-exempt Policy

Proceeds are non-taxable, however the policy is

Deemed to have been surrendered immediately

Before death and the taxable gain is realized.
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Policy Gains
These come from the disposition of a life insurance policy and are calculated on
the first anniversary after March 31, 1977. Any gains before this date are taxfree. Policies issued before the introduction of accrual taxation enjoyed a
conditional protection from such taxation.
Grandfathering and Anti-Abuse Rules
Grandfathering and anti-abuse rules preserve favourable tax treatment for pre
December 2, 1982 policies as long as the following types of policy changes do
not disqualify policies:
Prescribed Premiums
Prescribed premiums are paid in excess of the scheduled contractual premium,
where schedule was established before December 2, 1982. Prescribed premium
results from changes to plans with higher cash values, policy size increases or
unscheduled deposits. This includes Universal Life. Premiums for policy riders
are excluded.
Prescribed Increase in Benefit on Death
This is an increase in the death benefit of a policy at a particular time other than
an increase fixed and determined before December 2 1982 and scheduled to
take place at that time.
The following situations are exempted

Policy dividends used to buy paid-up additions.

Addition of accidental death benefits.

Any new rider, other than accidental death benefit is deemed a separate
policy.
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The rules provide that a pre December 1982 life insurance policy will
become non-exempt (subject to annual taxation) if:

A prescribed premium has been paid or

Policy is not an exempt policy or

There has been a prescribed increase in a death benefit.
Over-Accrual on Disposition of Non Exempt Policies
If the proceeds at disposition are less than the ACB, a deduction is allowed to the
lesser of:

The difference

The amount previously reported
1) DEDUCTIBILITY OF PREMIUMS
The first rule of life insurance is that premiums cannot be deducted and death
benefits are not subject to tax.
Like any good rule, there are certain exceptions.

The policy is registered as an RRSP – savings portion of insurance premium
is tax deductible.

Collateral insurance premiums are deductible if policy was purchased as
collateral for a loan that will produce taxable income. Some rules apply.

Premiums for life insurance gifted to a registered charity are deductible
(considered a charitable gift).
2) INTEREST FROM ALL SOURCES ARE TAXABLE
Interest:

Earned by dividends, and interest earned by proceeds on deposit

Earned on pre-paid premiums

Excess interest earned on annuity payments and any interest element in
annuity payments

Earned on delayed claim payments

Income taxed on accrual basis and taxable policy gains
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Interest is taxed as accrual income except for delayed claim payments wherein
interest is taxed when received. Interest on a policy loan used to produce
taxable income is deductible.
Pre-Paid Premiums
Interest earned on lump sum pre-payment is taxable. When a lump sum
payment is non-refundable, considered to be locked in – interest earned is not
taxable. Deposit will be included in the policy value and could cause the policy to
fail the exemption test.
WHAT HAPPENS WHEN A LIFE INSURANCE POLICY CHANGES
OWNERSHIP?
Is there any gain when someone transfers ownership of a policy to someone
else, when no money is taken out of the policy? Care should be taken, as the
transfer may generate a taxable gain.
Some points to look at:

A transfer can be a “sale” of the policy for money or a straight transfer of
ownership for no consideration.

A transfer of ownership is a disposition for tax purposes and this means there
could be a policy gain.

In addition, a pre December 2, 1982 policy may lose its preferred tax status
on transfer unless it is transferred to a related party.
There could be different tax treatment depending on whether the transaction is:
1. Arm’s length or
2. Non-Arm’s length
1. Arm’s length
All transactions must reflect, “ordinary commercial dealing between parties acting
in their separate interests” (IT-419), in order to be considered at arm’s length.
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2. Non-Arms length
Non-Arms length can include related persons such as:

Corporation and controlling shareholder.

Sister corporations controlled by same people.

Parent and Subsidiary Corporation.

Unrelated people acting together to reduce taxes.
Section 148(7) of the Income Tax Act deems transfers, gifts of the policy or
distribution of a policy from a corporation to be disposed for their “value” (CSV).
Section 148(8) of the Income Tax Act provides certain exceptions, which are
deemed to be sold at ACB.
For all of the following examples:

We used a $100,000 permanent policy issued in 1983.

Total CSV of $220,000.

ACB of $25,000.
Example 1
Sale to an unrelated or related person or
corporation for proceeds equal to the CSV.
Seller receives proceeds of:
$220,000
Less ACB
$ 25,000
Total
$195,000
Purchaser obtains policy with ACB of:
$220,000
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Example 2
Sale to an unrelated individual or corporation
for NO proceeds received.
Seller receives proceeds of:
$
10
Less ACB
$ 25,000
Policy Gain
$
10
Purchaser obtains policy with ACB of:
$
10
Exceptions to example 3 where there is no gain on transfer:

Transfer from parent to child where child is life insured.

Transfer from spouse to spouse where anyone is life insured.

Transfer from common-law spouse to common-law spouse (effective after
1992).

Transfer from trust to beneficiary of the trust.
Example 3
Policy is given for a Gift.
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Seller deemed to receive proceeds of:
$220,000
Less ACB
$ 25,000
Policy Gain
$195,000
Purchaser obtains policy with ACB = CSV
$220,000
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Corporate or Personally Owned Life Insurance – From a Taxation
Perspective
All of the following factors are important when considering the purchase of
Corporate owned life insurance. We will focus on one key consideration that is
often ignored.
That is, what is the likelihood that a corporate owned policy on the life of the
business owner, will have to be transferred out from the company to him because
of sale of the business? The adverse tax consequences of such a transfer might
outweigh any “tax savings” of paying premiums corporately.
Advantages of Corporate Ownership. (Disadvantage of Personal Ownership)

Reduced tax rate on dollars from which the premium is paid.

Eliminates concern over age differences in multiple owner buy- sell situations.

Psychologically attractive to business owner.

Easier to administer multiple policies in buy sell scenarios.
Disadvantages of Corporate Ownership (Advantages of Personal Ownership)

Not protected from creditors.

Possible dividend restrictions in financing agreement may prevent payment of
capital dividends after death.

Possible gain and shareholder benefit if necessary to transfer policy to
shareholder (life insured) at a future date.

CSV of life insurance policy included in valuation of shares immediately
before death of shareholder.

Full amount of death benefit is not available to shareholders tax-free via CDA
if policy still has an ACB.

Added complexity and costs of tax filings regarding CDA etc.
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HOW DO YOUR CLIENTS QUALIFY FOR THE LIFETIME CAPITAL GAINS
EXEMPTION?
To qualify, they must be disposing of these types of investments:
Qualified farm property
Family farms and farm quotas. If you acquired the property before June 18, 1987,
and it was actively used as a farm property in any of the past five years or if it
was acquired after June 17, 1987, and has been owned for at least two years,
been continually used as a farming property and you have earned more before
tax income on farming than on other sources, then your property will qualify.
Qualified Small Business Corporations (QSBCs)
The sale or deemed disposition of certain private company shares (called QSBC
shares) may give rise to the $500,000 lifetime capital gains exemption. Shares
will be considered Qualified Small Business Corporation shares where certain
conditions are met, including: only you and/or your relatives may have owned the
specific shares over the past 24 months. Further, all or substantially all (90% or
more) of the assets of the corporation must be used in an active business carried
on primarily (50% or more) in Canada at the time of the sale of the shares.
Finally, it must be true that 50% or more of the assets of the corporation must
have been used in an active business carried on primarily in Canada throughout
that 24-month period.
If your client is considering selling property that may qualify for this exemption
since the definition of QSBC shares above has been simplified, suggest that they
speak to their accountant, unless you specialize in this area.
A further option for tax savings would be to claim capital gains reserves in order
to defer capital gains on the sale of property. This is possible when you sell
property and do not receive the entire proceeds right away. The reserve is
calculated as the total gain on the sale multiplied by the proceeds received by the
end of the year divided by the total proceeds.
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They can claim this reserve and pay their capital gains tax over a period not
exceeding five years (pay 1/5 of the tax per year), which is essentially deferring
tax payments. If your property is a family farm or shares of a Small Business
Corporation that was transferred to a child then you can pay your capital gains
tax in instalments over a period as long as 10 years.
Their capital gains exemption is reduced, however, by investment losses. The
amount that your exemption is reduced by is the Cumulative Net Income Losses
(CNIL) from all previous years. The CNIL itself is reduced by the following
factors: interest costs on investment loans, carrying charges and interest on any
business that you do not have direct control over, losses on partnerships or coownerships, rental or leasing losses and capital losses deducted versus capital
gains that aren't eligible for the exemption. The exemption may also be restricted
if you have ever claimed an Allowable Business Investment Loss (ABIL).
Revenue Canada looks at 3 components:

Small Business Corporation definition

Shareholder Holding Period Test

Holding Period Asset Test
Small Business Corporation (SBC) definition
The shares, at disposition, must be shares of a SBC owned by the individual, the
individual’s spouse or a partnership related to the individual.
What is SBC?
A Canadian controlled Private Corporation (CCPC) where all, or substantially all,
of the fair market value (FMV) of the assets are:
1. Used in an active business carried on primarily in Canada by the corporation
or related corporation.
2. Shares or debt of another SBC that is connected with the corporation, or
3. A combination of assets described in 1 or 2.
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Shareholder Holding Period Test
The shares must not have been owned by anyone other than the individual or a
person or partnership related to the individual throughout the 24 months
preceding the disposition.
Holding Period Asset Test
Throughout the relevant shareholder-holding period immediately preceding the
disposition, the corporation must meet all of the tests discussed earlier for a
SBC, with the exception that the 90% asset test is reduced to 50% asset test.
If the shares are held through a holding company, the shares must meet the
shareholder holding period test and the holding period asset test. If the holding
company shares meet the 50% test but not the 90% test at any time in the
relevant 24-month period, the connected corporation (not the holding company)
must, for that period, meet the 90 percent test.
Exception (at death)
If immediately before the death of an individual, a share would be a QSBCS of
the individual, except that it did not meet the definition of a SBC, the share shall
be deemed A QSBCS if it was a QSBCS of the individual at anytime in the 12
month period immediately preceding the death of the individual.
Note
The $500,000 is available to each shareholder of the qualifying corporation. So,
if there are 3 shareholders, up to $1,500,000 of capital gain could be exempted
on the sale of that business. In other words, the $500,000 is accrued to the
individual taxpayer and not to any particular corporation.
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Example of Corporate Structures
Example 1
SHAREHOLDER
OPERATING
COMPANY
(BUSINESS)
Example 2
SHAREHOLDER
OPERATING
COMPANY
(BUSINESS)
OPERATING
COMPANY
(BUSINESS)
Assume that the business is active, both companies are Canadian controlled
private corporations and the shareholder(s) have held the share for at least 24
months.
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In the first example, the shareholder directly owns 100% of the Operating
Company. Provided the assets of the operating company meet the 50% Holding
Period Test, as well as the 90% test, the shares qualify for the $500,000
exemption.
In example 2, note that it is the shares Holding Company that must be sold (or
deemed sold on death) by the shareholder in order for the shareholder to claim
the exemption. If Holding Company sold its shares in Operating Company; no
exemption would be available to anyone.
In order for the shareholder to get the $500,000 exemption on the sale of the
Holding Company:
Throughout the 24 months before the sale, 90% of the FMV of Holding
Company’s assets must have been active business assets or shares or debt of a
qualifying small business corporation.
TAXATION AND ANNUITIES
Annuities are issued in two classifications:

Immediate Annuities

Deferred Annuities
These are both taxed mostly on an accrual basis. Deferred Annuities were taxed
either annually or tri-annually at the option of the policy owner, but since 1989,
they are taxed annually by regulation.
Annuity contracts are considered an investment vehicle and so interest on money
borrowed to purchase an annuity is tax deductible.
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Annuity contracts taxed other than accrual basis, are taxed on a proportional
basis

Grand fathered Annuity Contracts acquired, and with annuity payments
commencing before December 2, 1982.

Settlement options producing annuity payments from pre December 2, 1982
life Insurance policy.

Annuity contracts with “Lock-in” payments with no commutation rights.

Prescribed annuity contracts (PAC)
Notes:
On contracts issued before December 2, 1982, any unallocated interest income
accrued prior to 1982 will be taxed if policy is surrendered before maturity or
taxed as part of annuity payment. After commencement of payment, the accrual
tax may change to proportional.
Prescribed Annuity Contracts
Most annuities issued since 1986 are prescribed annuity contracts unless
otherwise designated.
To qualify as a PAC, the following is required:

Annuity payments must already be commenced.

Each owner of the contract must be an annuitant. Annuitants can be an
individual testamentary trust, group person insured with a term life insurance
policy periodic payment following the deaths of employees (joint and survivor
beneficiaries qualify).

Payments must be of equal amounts (Joint & Last Survivor may decrease at
1st death).

Annuitants must not have elected accrual taxation.

Annuity payments can be fixed term for life on the life of the first holder or
Joint and Survivor option with spouse, brothers or sisters of the first holder,
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Unregistered Annuity
When an annuity contract is not registered as an RRSP, it can provide a lifetime
payment that is tax advantaged. The annuity payment consists of two elements;
interest and principal and only the interest are taxable. This provides a much
larger after tax income. Since most retirement income is taxable (RRSP’s,
RPP’s, etc.) the tax-free component can be very important.
How the Interest Element is determined for:
Prescribed Annuity Contracts
PAC’s are exempt policies and the interest element is level, e.g. each payment
contains the same amount of interest.
The interest element is calculated as follows:

Purchase Price  Total Number of Payments = Principal element of each
payment.

Annuity Payments – Principal Element = Interest Element.

Interest Element X 12 = Annual Taxable Portion.
Non-Exempt Annuities
Non-exempt annuities are subject to accrual taxation and the payments are quite
different. The earlier payment contains a much larger interest element due to the
large principal interest earning and so taxation is larger in the early years and
declines, as the interest element gets smaller. The capital element increases to
maintain the level payment guarantees. If an annuity is surrendered before
maturity the proceeds in excess of the ACB is taxable. Any accrual gains before
March 31, 1977 will be included in the ACB to avoid double taxation.
Life Annuity
When an annuitant dies, a deemed taxable disposition occurs whether before
maturity or after payments commence. Policies issued before November 13,
1981 are taxed according to the “old” rules.
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The interest portion of any payments accrued but not paid is calculated on a daily
basis and is included in taxable income. Any annuity payments continuing under
a guarantee to the estate, beneficiary or joint life annuitant are taxable in their
hands.
Term Certain Annuity
Interest is taxed on the accrual basis. The calculation is similar to a life annuity
calculation. The interest element of each payment guaranteed after death is
taxable.
Family Rider Income Benefits
Family rider benefits are a monthly benefit guaranteed for a certain number of
years from date of issue (e.g. 20 year) and paid but the month. The death
benefit (sum insured) is regarded as term certain, and the interest portion is
taxable. Similar principles apply to reducing term policies or “riders” that are paid
out in periodic payments to a beneficiary.
Calculation of Exempt Portion of Payments

The commuted value, as of the date of death, of the periodic payments, plus

The present value of the basic face amount to be paid at the end of the
period, minus

The actual amount of future payment. If the face amount is payable
immediately at death, it is just the commuted value of the periodic payments.
TAXATION OF EQUITY BASED FUNDS
Mutual Fund
Shareholders pay tax on dividends and capital gains received or accrued on a
“flow-through” basis and shareholders may claim the dividend tax credit.
Trust Mutual Funds
The unit holders are also taxed at personal tax rates, but the dividend tax credits
only apply to taxable Canadian Corporations.
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The taxpayer can claim a tax credit for any foreign tax paid, but not claim a
dividend tax credit from this source.
Variable Contracts
Are taxed on an accrual “flow-through” taxation basis. Each year the insurer
issues a T3 form that details the allocation of interest, dividends and capital
gains. Interest is treated as a capital gain.
The allocations are added to the cost base, because they are tax paid.
After maturity, the interest portion of each payment if guaranteed is taxable.
If the annuity is not guaranteed, but is a true variable annuity payment, T3 slips
will continue to report the allocations.
What is a Segregated Fund?
Assets of a segregated fund do not form part of the general reserves of the
insurer (i.e. segregated), 100% of assets permitted to be invested in equities.
What is a Variable Contract?
Contract of life insurance under which the reserve, in whole or in part, varies in
amount depending upon the market value of the assets of the segregated fund.
The contract holder takes some of the risk. If a variable contract guarantees that
at least 75% of the gross premiums are returned at maturity or death of the
person insured, then contract is a life insurance contract under provincial life
insurance acts.
Advantages

Designate Beneficiary

Death benefit can avoid estate / probate

Creditor protection

Comp Corp protected.
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Registered Variable Funds (RRSP)

Tax deferred until withdrawal of funds.
Non-Registered Variable Funds

Different than life insurance policy.

Own an interest (unit) in an inter-vivos trust.

Capital property.
Taxation of Income

Income deemed to be payable in the year to the trust beneficiaries.

Allocated based on ownership interest using a T3.

Allocations added to contract holder’s cost base (tax paid).

“Income” is actual interest and dividends received and gains / losses on
shares sold by the trust.

“Income” is NOT the growth in unit values each year.
Taxation at Disposition
Treated like any capital property.
RRSP’S AND TAXATION
All premiums are deductible, except Life Insurance portion; all proceeds are
taxable.
WITHHOLDING TAXES
Amount
Common-Law
Provinces
Quebec
Federal
Que.
$5,000 or less
10%
5%
13%
$5,000 - $15,000
20%
10%
20%
$15,000 +
30%
15%
20%
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All proceeds are taxable when withdrawn, or at death

FMV taxable in deceased’s estate.

Rollover to spouse – taxable in their current year income
Proceeds are tax deductible to spouse if:

Spouse rolls proceeds to their RRSP, RRIF or if over age 71.

If not spouse, FMV may be transferred to dependent child (grandchild) –
taxed at child’s tax rate, or if the child is under the age of 18, they may
purchase a term certain for the number of years between their current age
and age 18.

If the child is physically or mentally infirm, the FMV may be taxed in their
hands in current year or if used to acquire an RRSP, RRIF or life or term
annuity (not to exceed age 90) proceeds can be deducted from current year’s
income.
Death after Maturity
All payments or commuted value must be included in estate terminal filing with
Canada Revenue Agency.
Note: Roll over provisions for spouses and financially dependent children.
TAX SHELTERED INVESTMENTS
Taxpayers must specifically identify any tax shelter investment deductions or
credits, accompanied by a shelter identification number, on their tax return. Tax
shelter promoters should provide the necessary filing forms and relevant details,
such as the amounts for losses or deductions.
Taxpayers face a number of limitations with respect to tax-shelter deductions and
credits. Such deductions and credits can result in alternative minimum tax (AMT)
limited by at-risk rules, which state that individuals may not write off more than
the cost of their investment.
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Deductions and credits will also be limited if loans related to tax shelters are
considered limited-recourse debt, as defined by the Income Tax Act. Limitedrecourse provisions require that money must be borrowed with bona fide
arrangements to repay the principal within 10 years. Interest must be payable
regularly at prescribed rates, with the investor at full risk for the loan. Limited
recourse debt is not included in the adjusted cost base (ACB) of an investment.
The definition of ‘tax shelter’ includes ‘gifting arrangements’ and certain
investments that may result in tax credits, such as schemes involving donations.
Tax opinions of accountants and lawyers provided by the promoter of a tax
shelter, or the existence of a tax shelter identification number, do not indicate that
the CRA has confirmed that deductions or credits related to the tax shelter will be
allowed. It is common for the CRA to disallow deductions from tax shelters, often
reassessing years where they had previously allowed them. Before you invest in
a tax shelter, always seek independent tax advice from your certified general
accountant to assess the potential risks and benefits.
Limited Partnerships (LP)
Limited partnerships (LP) provide limited liability while allowing the investor a
flow-through of tax losses. LP investors are taxed on their share of income or
loss in the partnership. Cash distributions represent partnership drawings and
reduce the limited partner’s ACB but do not represent taxable income.
For partnership interests acquired after February 22, 1994, a capital gain must be
reported where limited or passive partners have a negative ACB in their
partnership interest at the end of a fiscal period. This provision will prevent taxshelter arrangements where tax-deductible losses are claimed and the investors
subsequently receive cash distributions exceeding the partnership interest costs.
Only the income or loss for a prior (not the current) period will be taken into
account in determining the ACB of a partnership interest.
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Rental Real Estate and Real Estate Limited Partnerships
Rental real estate used for commercial purposes might provide taxpayers with
the ability to leverage capital, write off expenses, earn CCA-sheltered rental
income, and enjoy capital appreciation on their investment.
Market considerations aside, however, some tax aspects associated with rental
real estate could potentially reduce its appeal. For example, while CCA in respect
of a rental property may be claimed to shelter net rental income from tax, it may
not be claimed to create or increase a loss. Further diminishing the potential
advantages of claiming CCA on rental real estate is the fact that when the
property is sold, any recapture will be added to the investor’s income to the
extent that the proceeds of disposition exceed the undepreciated capital cost.
A limited partnership may slightly escalate the rate at which CCA can be claimed
because the partnership claims the CCA and the investor deducts the financing
costs. If the investor acquired the property directly, the financing costs would
increase the rental expenses and potentially reduce the permitted CCA claim.
Rental income received from real estate might, under certain circumstances, be
considered by the CRA to be either income from a business or income from
property. That is a key distinction because the two are sometimes treated
differently from a tax standpoint.
In determining whether rental property is associated with a business venture, or
income from property, the tax courts may look to factors such as the existence of
a written, formal business plan and revenue flow that is not overshadowed by
financing expenses.
However, the differences between business and property income are not clearly
defined in the Income Tax Act; therefore, it is best to check with your certified
general accountant to get any clarification.
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Labour-Sponsored Venture Capital Corporation (LSVCC)
Labour-sponsored venture capital corporations (LSVCC) are investments
sponsored by labour organizations that allow individuals to pool their money to
purchase a diversified portfolio of small- and medium-sized businesses. The
federal and some provincial governments, provide a maximum credit of 15 per
cent on a $5,000 investment under this program, thus providing combined federal
and provincial tax credits totaling $1,500. Provincial tax credit will vary from
Province to Province.
This tax credit does not reduce the ACB of the shares but will reduce any capital
loss realized on their disposition.
To avoid a tax-credit claw back, LSVCC investments must be held for at least
eight years (five years if they were purchased prior to March 6, 1996). In case of
death, the LSVCC can be redeemed immediately, without claw back of the tax
credits.
Taxpayers can register their LSVCC purchase as an RRSP and receive the
normal RRSP tax deduction as well as the federal and provincial tax credits.
Investments made in an LSVCC in the first 60 days of the year will qualify as
contributions for either the previous or current tax year.
LSVCC shares redeemed during the month of February or on March 1 of a
calendar year are treated as having been redeemed 30 days later. This means
shareholders who are 30 or fewer days short of holding their investment for the
requisite number of years will avoid claw back of the tax credit. They will also
have the opportunity to acquire new LSVCC shares during the first 60 days of a
year using proceeds from the redemption of existing shares, (thus also making
them eligible to claim a tax credit for the previous year).
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Oil, Gas and Minerals
Special tax incentives exist to encourage individuals to risk capital for the
exploration and development of oil, gas and minerals. These incentives are
offered through limited partnerships, joint ventures, flow-through shares, and
royalty trust units. Through such vehicles, individuals may be eligible to deduct
specific exploration expenses and other resource-related incentives.
Joint ventures are similar to limited partnerships except that at-risk rules do not
apply. Partnerships and joint ventures may also be eligible for additional tax
benefits in the form of provincial crown royalty tax rebate programs.
Flow-through shares allow issuing companies to renounce certain deductions in
favour of the investor. The initially acquired shares are priced at a premium to
market value so the company can participate in the tax savings. Investor
deductions generally reduce the cost base of the shares to zero, resulting in a
capital gain equal to the entire proceeds when the shares are sold.
There is a 15 per cent investment tax credit available for specified mineral
exploration expenses incurred in Canada. It is a non-refundable credit available
to investors pursuant to a flow-through share agreement.
As an example, Ontario residents who qualify for the aforementioned federal
credit with respect to expenses incurred for mineral exploration in Ontario may
also qualify for a five per cent provincial tax credit through the Ontario focused
flow-through share (OFFTS) tax credit. The Ontario portion is refundable.
In 2002, the government also introduced enhanced tax incentives with respect to
the availability of flow-through shares for investors in certain renewable energy
and energy conservation projects.
These apply to Canadian renewable and conservation expenses (CRCE)
incurred after 2002 in respect of flow-through share agreements entered into
after July 26, 2002.
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Universal Life (UL) Insurance Policies
Although exempt universal life (UL) insurance policies are not tax shelters, they
do offer some tax advantages.
Under a UL policy, for instance:

Premiums paid in excess of the mortality cost and premium tax are
accumulated and invested. Income tax on the returns of investments held
within the accumulation fund is deferred until withdrawals are made from the
policy; and

When the policyholder dies, beneficiaries generally receive both the face
value of the life insurance and full amount of the accumulation fund tax-free,
resulting in a permanent avoidance of tax and partially funding the estate out
of pre-tax dollars.
Furthermore, UL can be used to fund retirement needs. Individuals can, for
example, borrow from their policy or pledge it as security for a loan, subject to the
terms of the policy, with the loan providing a cash flow to fund retirement. Since
this cash has resulted from a loan, rather than income, it is not taxable.
Also, if repayment of the loan is deferred until the death of the policyholder, the
loan will effectively be partially repaid out of pre-tax dollars.
UL insurance is, however, a complex product and should only be purchased with
professional advice, including a full explanation of the plan’s terms, underlying
investments and costs.
CANADIAN FEDERAL BUDGET 2011
There are no tax increases contained in the budget, nor any changes to
previously promised tax rate reductions. Government expenditures will continue
to grow, although there are expected savings from strategic reviews of
government departments and agencies and continued restraint in government
wage increases.
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There were no tax rate reductions for individuals announced in the budget but
some small tax credit enhancements were announced for families.
While there were some limited enhancements to support retirement savings such
as the increase to the Guaranteed Income Supplement for low-income seniors,
there were no enhancements to the Registered Retirement Savings Plan (RRSP)
and Tax-Free Savings Plan (TFSA) regimes.
Some tax loopholes were eliminated. These included preventing the deferral of
tax by the use of partnerships and eliminating the ability to avoid capital gains tax
when flow-through shares are donated to a charity.
No changes are proposed for the Scientific Research and Experimental
Development tax credit system. Many companies performing research and
development who are not entitled to refundability of the tax credits were hoping
that the program would be expanded to give some relief in this area. This is an
opportunity to assist these companies who are trying to further the country’s
innovation agenda and improve productivity.
There were also no provisions to encourage so-called angel investing in start-up
companies. We had encouraged the creation of an angel investment tax credit
but this was not proposed in the budget.
The budget indicates that the federal government is continuing to work with the
provinces and territories to implement the pooled plans. No other measures were
introduced to encourage savings or to raise the RRSP or TFSA limits.
The following is a summary of the highlights contained in the budget.
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Measures concerning businesses
The budget proposes to extend the temporary incentive for accelerated capital
cost allowance for machinery and equipment primarily for use in Canada for the
manufacturing or processing of goods for sale or lease for an additional two
years. This measure will apply to eligible machinery and equipment purchased
before 2014.
The budget proposes to expand Class 43.2 (specified clean energy generation
and conservation equipment – declining balance capital cost allowance (CCA)
rate of 50%) to include equipment that is used to generate electrical energy in a
process in which all or substantially all of the energy input is from waste heat.
This measure will apply to eligible assets acquired on or after March 22, 2011,
that have not been used or acquired for use before that date.
The budget proposes that the rules governing qualifying environmental trusts
(QETs) be extended to apply to a trust that otherwise meets the conditions of the
Income Tax Act for being a qualifying environmental trust that is (a) created after
2011 in connection with the reclamation of property primarily used for the
operation of a pipeline; and (b) required to be maintained by order of a tribunal
constituted by a law of Canada or a province. The budget also proposes to
expand the range of eligible investments that a qualifying environmental trust
may hold. Lastly, the budget proposes to set the rate of tax payable by a QET to
the corporate income tax rate generally applicable for the 2012 and later taxation
years. These changes will apply to the 2012 and subsequent taxation years.
Currently, the cost of oil sands leases and other oil sands resource property can
be treated as Canadian development expense (CDE) which is deductible at the
rate of 30% per year. In order to better align the deduction rates for intangible
costs in the oil sands sector with rates in the conventional oil and gas sector, the
budget proposes that these costs be treated as Canadian oil and gas property
expense (COGPE) which is deductible at 10% per year. This measure will be
effective for acquisitions made on or after March 22, 2011.
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Currently, development expenses incurred for the purpose of bringing a new oil
sands mine into production in reasonable commercial quantities are treated as
Canadian exploration expense (CEE) which can be deducted in full in the year
incurred. In order to better align the deduction rates for pre-production
development costs in oil sands mines with rates applicable to in situ oil sands
projects and the conventional oil and gas sector, the budget proposes that these
costs be treated as CDE which is deductible at the rate of 30% per year. This
measure will be effective as of 2015 for new mines on which major expenses
construction began before March 22, 2011. For other expenses, the transition
from CEE to CDE will be phased in on a gradual basis, becoming fully phased in
by 2016.
The budget proposes to extend the application of the stop loss rules that apply to
reduce, in certain cases, the amount of a loss otherwise realized by a corporation
on a disposition of shares by the amount of tax free dividends that have been
received or deemed to have been received on those shares on or before the
disposition to include any deemed dividends to be received on the redemption of
shares held by a corporation, except where the dividends deemed to have been
received were from the redemption of shares of the capital stock of a private
corporation that are held by a private corporation. This measure applies to
redemptions that occur on or after March 22, 2011.
The budget proposes to limit the deferral opportunities for corporations with a
significant interest in a partnership that has a different fiscal period than the
corporation’s taxation year. In computing the corporation’s income for the
taxation year, it will be required to accrue income from the partnership for the
portion of the partnership’s fiscal period that falls within the corporation’s taxation
year. The additional income for the first year will be brought into the corporation’s
income over a five year period. This measure will apply to taxation years of a
corporation that end after March 22, 2011.
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The government plans to review the existing rules relating to Employee Profit
Sharing Plans to ensure that employers are using these plans for their intended
purpose, rather than, for example, to direct profit participation to family members.
Before proceeding with any changes, the government will consult with
stakeholders.
The AgriInvest program, which provides an incentive to farmers to set aside
savings through government-matched contributions, is being supplemented in
Quebec by the Agri-Québec program. The budget proposes to provide the same
tax treatment to the Agri-Québec program as the federal program.
The budget proposes a one-time credit of up to $1,000 against a small firm’s
increase in its 2011 Employment Insurance (EI) premiums over those paid in
2010. This new credit will be available for employers whose EI premiums were at
or below $10,000 in 2010.
Measures concerning individuals
The budget proposes a new 15% non-refundable Children’s Art Tax Credit for
eligible expenses up to $500. The credit will be available in respect of a child who
is under 16 years of age at the beginning of the year who is enrolled in an eligible
artistic, cultural, recreational or developmental activity. This credit will be
structured in the same manner as the existing Children’s Fitness Tax Credit. The
credit will apply to eligible expenses paid in the 2011 and subsequent taxation
years, and will be able to be claimed by either parent, or shared by both parents.
A Family Caregiver Tax Credit is proposed for a caregiver of a dependent person
who has a mental or physical infirmity. The credit will be integrated into the
existing dependency-related credits and will be based on an amount of $2,000.
The credit will apply beginning in 2012.
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The Medical Expense Tax Credit in respect of a dependent relative (other than a
child who has not reached the age of 18 years before the end of the taxation
year) is proposed to be amended to remove the current $10,000 limit on eligible
expenses that can be claimed. This measure will apply to the 2011 and
subsequent taxation years.
The Registered Disability Savings Plan (RDSP) rules are proposed to be
amended to enhance the ability for a beneficiary with a shortened life expectancy
to withdraw amounts from the RDSP without triggering the 10-year repayment
rule in respect of Canada Disability Savings Grants and Canada Disability
Savings Bonds. This measure will apply, subject to a transitional measure, after
2010 to withdrawals made after Royal Assent.
The budget proposes to allow for greater flexibility with respect to the allocation
of Registered Education Savings Plan (RESP) assets among siblings by
expanding the ability to transfer between individual RESPs for siblings, without
tax penalties or triggering the repayment of Canada Education Savings Grants,
to individuals who are not connected by blood or adoption, such as aunts or
uncles. This proposal will apply to asset transfers that occur after 2010.
The Tuition Tax Credit is proposed to be amended to include certain
occupational, trade or professional examination fees and ancillary fees and
charges as eligible fees for the credit. This amendment will apply to eligible
amounts paid in respect of examinations taken in the 2011 and subsequent
taxation years.
The Tuition, Education and Textbook Tax Credits, as well as eligibility for
Educational Assistance Payments (EAPs) from an RESP, are proposed to be
amended to accommodate the fact that many programs at foreign universities
are based on semesters that are shorter than 13 weeks. The minimum course
duration for these purposes is proposed to be reduced from 13 weeks to three
consecutive weeks.
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This amendment will apply with respect to tuition paid for courses taken in the
2011 and subsequent taxation years and to EAPs made after 2010.
The RRSP rules are proposed to be amended to address certain perceived
abuses, a number of which involved accessing RRSP funds without a
corresponding income inclusion. Measures similar to those recently implemented
in respect of TFSAs are proposed to be introduced for RRSPs. Subject to certain
exceptions, these measures are proposed to apply to transactions occurring and
investments acquired after March 22, 2011. (For these purposes investment
income earned after March 22, 2011 on previously acquired investments will be
considered a transaction occurring after March 22, 2011.)
The budget proposes two amendments in respect of Registered Pension Plans
that are considered Individual Pension Plans (IPPs).
Similar to the requirements applicable to a Registered Retirement Income Fund,
annual minimum amounts will be required to be withdrawn from an IPP once a
plan member reaches 72 years of age. This measure is proposed to be
applicable to the 2012 and subsequent taxation years.
Contributions to an IPP that relate to past years of employment will be required to
be funded first out of RRSP assets or a reduction in RRSP contribution room
before a deductible contribution can be made. This measure is proposed to be
generally applicable to past service contributions made after March 22, 2011.
The Canada Revenue Agency (CRA) will clarify the application of the pension tax
rules with respect to the tax treatment of lump sum amounts received by former
employees in lieu of their rights to health and dental coverage from employers
who have become insolvent and whose underfunded pension plans were wound
up. These amounts will not be treated as income for tax purposes in relation to
insolvencies arising before 2012.
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The tax on split income, also known as the “kiddie tax”, is proposed to be
amended to extend the application of the 29% tax to certain capital gains. The
provision is proposed to apply to capital gains realized on the disposition of
shares of a corporation to a person who does not deal at arm’s length with the
minor, if taxable dividends on those shares would have been subject to the
“kiddie tax”. If this provision applies, the capital gains will be treated as dividends
and neither the capital gains inclusion rate nor the lifetime capital gains
exemption will apply. This measure is proposed to apply to capital gains realized
on or after March 22, 2011.
Eligibility for the Mineral Exploration Tax Credit is extended for one year to flowthrough share agreements entered into on or before March 31, 2012.
A new 15% non-refundable Volunteer Firefighters Tax Credit is introduced. This
credit is based on an amount of $3,000 and is proposed to be available to
individuals who perform at least 200 hours of volunteer firefighting in a taxation
year. Volunteer service hours will not qualify if the firefighter also performs nonvolunteer services to a particular fire department. An individual who claims this
credit will not be eligible for the current $1,000 tax exemption for honoraria paid
in respect of firefighting. This credit will apply to the 2011 and subsequent
taxation years.
Eligibility for the 15% non-refundable Child Tax Credit (based on an indexed
amount - $2,131 in 2011) is proposed to be modified to eliminate the restriction
that only one credit may be claimed per domestic establishment. This will ensure
that where two or more families share a home, each eligible parent will still be
entitled to claim the credit. This measure will apply to the 2011 and subsequent
taxation years.
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In order to prevent taxpayers from acquiring and donating flow-through shares at
little or no after tax cost, the budget proposes to allow the exemption from capital
gains tax on donations of flow-through shares only to the extent that cumulative
capital gains in respect of dispositions of shares of that class exceed the original
cost of the flow-through shares. This measure applies for shares issued pursuant
to a flow-through share agreement entered into on or after March 22, 2011.
The budget proposes to clarify that the Charitable Donations Tax Credit or
Deduction is not available to a taxpayer in respect of the granting of an option to
a qualified donee to acquire a property of the taxpayer until such time that the
donee acquires the property that is the subject of the option. The taxpayer will be
allowed a credit or deduction at that time based on the amount by which the fair
market value of the property exceeds the total amount, if any, paid by the donee
for the option and the property. This measure will apply in respect of options
granted on or after March 22, 2011.
The budget proposes that the tax recognition of the donation of a non-qualifying
security of a donor, for the purposes of determining eligibility for the Charitable
Donations Tax Credit or Deduction, will be deferred until such time, within five
years of the donation, that the qualified donee has disposed of the non-qualifying
security for consideration that is not another non-qualifying security. This
measure will apply in respect of securities disposed of by donees on or after
March 22, 2011.
The government intends to renew two EI pilot projects for one year. The Working
While on Claim pilot project, available across Canada, will allow EI claimants to
earn additional money while receiving income support. It will be renewed until
August 2012. The Best 14 Weeks pilot project, which allows claimants in 25
regions of higher unemployment to have their EI benefits calculated based on the
highest 14 weeks of earnings over the year preceding a claim, will be renewed
until June 2012.
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Custom tariff measures
The budget announces that the Government is initiating a process to simplify the
Customs Tariff in order to facilitate trade and lower the administrative burden for
businesses. The changes include a reduction of customs processing burden for
businesses, modification of the structure of the Customs Tariff, and technical
modernization of the Customs Tariff.
The budget proposes the introduction of three new tariff items to facilitate the
processing of low value non-commercial imports arriving by post or by courier.
These new items will apply generic Most-Favoured-Nation tariff rates of 0%, 8%
or 20%, depending on the description of the goods.
Other measures
The budget proposes a number of measures relating to charities, including: the
requirement that qualified donees be included on a publicly available list
maintained by the CRA; the potential suspension of receipting privileges,
revocation of qualified donee status or monetary penalties associated with
improper issuance of receipts; the extension of monetary penalties associated
with the failure to file information returns to registered Canadian amateur athletic
associations (RCAAAs); the extension to RCAAAs of other key regulatory
requirements that apply to registered charities; and the ability of the Minister of
National Revenue to refuse or revoke the registration of an organization if certain
offenses are committed by certain members of the organization.
The budget proposes that when property in respect of which a taxpayer received
a donation receipt is returned to the donor, the qualified donee must issue a
revised donation receipt and must forward a copy to the CRA if the amount of the
receipt has changed by more than $50. This measure will apply in respect of gifts
or property returned on or after March 22, 2011.
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The government has committed $400 million in 2011-12 for the ecoENERGY
Retrofit – Homes program to help homeowners make their homes more energy
efficient and reduce high energy costs.
A GLOSSARY OF ABBREVIATIONS AND ACRONYMS
ABIL
Allowable Business Investment Loss
ACB
Adjusted Cost Basis
AMT
Alternative Minimum Tax
AVC
Additional Voluntary Contribution
CCA
Capital Cost Allowance
CCPC
Canadian-Controlled Private Corporation
CRA
Canada Revenue Agency
CCTB
Canada Child Tax Benefit
CDNX
Canadian Venture Exchange
CESG
Canada Education Savings Grant
CNIL
Cumulative Net Investment Loss
CPI
Consumer Price Index
CPP
Canada Pension Plan
DPSP
Deferred Profit-Sharing Plan
DSLP
Deferred Salary Leave Plan
DTC
Disability Tax Credit
EHT
Employer Health Tax
EI
Employment Insurance
ENS
Eligible Net Sales
EO-LSVCC
Employee Ownership Labour-Sponsored Venture Capital
Corporation
FMV
Fair Market Value
GAAR
General Anti-Avoidance Rule
GAINS
Guaranteed Annual Income System for Seniors
GIC
Guaranteed Investment Certificate
GIS
Guaranteed Income Supplement
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GST
Goods and Services Tax
GSTC
Goods and Services Tax Credit
HBP
Home Buyer’s Plan
HST
Harmonized Sales Tax
IC
Information Circular
IRS
Internal Revenue Service (USA)
ITC
Investment Tax Credit
LIF
Life income fund
LIRA
Locked-in Retirement Account
LP
Limited Partnerships
LRIF
Locked-in Retirement Income Fund
LSIF
Labour-Sponsored Investment Fund
LTT
Land Transfer Tax
NCB
National Child Benefit
NISA
Net Income Stabilization Account
OAS
Old Age Security
OHOSP
Ontario Home Ownership Savings Plan
PA
Pension Adjustment
PAR
Pension Adjustment Reversal
PHSP
Private Health Services Plan
PSPA
Past Service Pension Adjustment
PST
Provincial Sales Tax
QPP
Quebec Pension Plan
R&D
Research and Development
RESP
Registered Education Savings Plan
RPP
Registered Pension Plan
RRIF
Registered Retirement Income Fund
RRSP
Registered Retirement Savings Plan
SBC
Small Business Corporation
SIN
Social Insurance Number
TONI
Tax on Income
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UCC
Undepreciated Capital Cost
UL
Universal Life
WC
Workers’ compensation
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