Author Segal LLP

Get Your Tax Information to Your Accountant Early

030317_Thinkstock_493829487_kwIt’s tax season, so it’s time to gather that pile of documents from employers, banks, administrators and others. You need to check their accuracy and hand them off to your tax advisor.

Accuracy is critical, as errors on these slips of information can affect your tax liability. Here are details on what to expect and look for.

Generally, your accountant has until midnight April 30, 2017, to file your 2016 income tax return.

What’s the Difference between a Deduction and a Credit?

Deductions are taken off your gross, taxable income and are generated by various expenses you incur. Because they reduce your taxable income on your federal tax return, they can lower your marginal tax rate.

Tax credits are subtracted directly from the amount of tax you owe to the federal or provincial governments. They generally aren’t dependent on your tax bracket and come in two varieties:

1. Nonrefundable tax credits. If, when you claim these, you lower your tax payable to $0, you don’t receive a refund for any balance of the credit.

2. Refundable tax credits. Amounts are refunded to you if your tax payable reaches $0.

The value of tax credits depends on what they are for. Some are granted for specific situations or under certain classifications.

Pay Close Attention to Deductions

Many deductions are overlooked. Be sure you don’t forget to give your accountant documents and receipts related to these common deductions:

Health. Premiums for medical coverage, including private insurance and amounts taken for employer plans, can all be deducted.

Registered Retirement Savings Plan (RRSP). Contributions can be deducted from taxable income. The maximum limit you may deduct for the current tax year is 18% of your income for the previous year, or $25,370 for 2016. You may contribute more if you didn’t use your entire RRSP deduction limit for previous years and you can carry forward unused contributions for life.

Childcare. Working parents can claim childcare costs for babysitters or nannies. You can claim payments made to:

  • Caregivers providing child care services,
  • Day nursery schools and daycare centres,
  • Educational institutions, for the part of the fees that relate to child care services,
  • Day camps and day sports schools where the primary goal of the camp is to care for children (an institution offering a sports study program isn’t a sports school), or
  • Boarding schools, overnight sports schools, or camps where lodging is involved.

Self-employment. You can deduct expenses for the part of your home you use for business. If you own your home, you can claim part of your mortgage interest and property taxes. If you rent, deduct part of your monthly rent. You can also deduct the cost of:

  • Utilities,
  • Maintenance expenses for the percentage of your living space used for business,
  • Travel,
  • Insurance,
  • Supplies, and
  • Client entertainment

Interest and carrying charges. Mortgage interest isn’t deductible, but several expenses related to financing or investment may be deducted, including, among others:

  • Interest on loans for investments or to purchase income-producing assets, and
  • Interest on the purchase of Canada Savings Bonds through a payroll deduction plan.
  • Fees paid to accountants to prepare and file your tax and benefit returns, certain legal fees and certain expenses that go to managers of your investments can also be deducted in certain circumstances.

Moving costs. You can claim eligible expenses if you moved and established a new home to work or run a business or if you moved to be a full-time student in a post-secondary program at a university, college or other educational institution. To qualify, your new home must be at least 40 kilometers (by the shortest usual public route) closer to your new work or school. Eligible expenses include moving costs, travel, accommodations, temporary living arrangements and the costs involved in selling your previous residence.

Union or professional dues. If you belong to a union or professional organization, you may deduct all amounts you paid related to your employment, including union dues, professional membership fees or premiums for professional liability insurance.

Tax Credits Add Up

Be sure your accountant is aware of any tax credits that may apply to you. Your eligibility can change on an annual basis. Here are some of the more common tax credit areas:

Disability. You can claim substantial credits provided you expect the disability to last at least 12 months. The disability tax credit is a nonrefundable credit for disabled persons or their supporting persons. Individuals may claim the $8,001 disability amount once they’re eligible for the credit. If they qualify for the disability amount and were under 18 years of age at the end of 2016, they may claim up to an additional $4,667.

If you missed taking the disability amount in the past, you can amend filed tax returns. If you don’t need to use some or all of the tax credit because you have little or no income, you may be able to transfer all or part of it to your spouse, common-law partner or other supporting person.

Medical benefits. If you paid for hospital services, paid to live in a nursing home, or bought medical supplies such as pacemakers, vaccines or walking aids, you may be able to claim a nonrefundable tax credit. Married taxpayers can maximize the medical credit by pooling nonreimbursed, eligible expenses on the tax return of the lower-earning spouse or common-law partner. Claim expenses for any consecutive 12-month period that ends in the year of the tax return. Your accountant can help you choose the best period to maximize the benefit of this credit.

Most provinces and territories also offer nonrefundable medical tax credits. When an insurance plan reimburses expenses, only those not covered by the plan can be claimed.

The list of medical expenses eligible for the credit is extensive and includes costs incurred outside Canada. Your tax specialist will know them all.

The following are some of the expenses you can’t claim as medical expenses:

  • Athletic or fitness club fees,
  • The cost of blood pressure monitors,
  • The cost of organic food, and
  • The cost of over-the-counter medications and supplements, even if they were prescribed by a medical practitioner

Equivalent-to-spouse. An individual may claim, under certain circumstances, the “amount for an eligible dependant” non-refundable tax credit for a dependent child or other dependent relative. The $11,474 credit for 2016 is reduced by income earned by the dependant and can be claimed by only one person. It can’t be claimed:

  • If you claim the spousal amount tax credit, or
  • The claim is for a child for whom you were required to make support payments during the year. If you and your spouse were separated for part of the year due to a breakdown in your relationship, you can still claim the credit, as long as you don’t claim any support amounts paid to your spouse, and as long as the child was under 18 years of age or mentally or physically impaired during the separation.

Charitable donations. There’s a credit for charitable donations that increases the more you give. In any one year, you may claim:

  • Donations made by December 31, 2016,
  • Any unclaimed donations made in the previous five years, and
  • Any unclaimed donations made by your spouse or common-law partner in the year or in the previous five years.

You can claim eligible amounts of gifts to a limit of 75% of your net income. For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income.

More about Credits

Education. Many people miss the chance to transfer credits when their children attend college or university. Make sure students file their own tax returns. If they don’t need all their tuition or education credits, they can transfer them to parents, grandparents, a spouse or common-law partner.

Pensions. If you receive eligible pension, superannuation or annuity payments you may claim a credit of as much as $2,000. The credit is nonrefundable and may not be carried forward. Canada Pension Plan (CPP), Old Age Security (OAS) or Guaranteed Income Supplements (GIS) aren’t eligible for the credit, but you can transfer it to your spouse or common-law partner.

Your accountant will help ensure that you get the most out of your available tax breaks, as long as you provide the necessary information and documents.

CRA’s Tricks and Traps for Tax Cheaters

022317_Thinkstock_640082576_lores_KWThe Canada Revenue Agency (CRA) has no tolerance for tax cheats and warns Canadians that it has a “robust system” in place to track down those who illegally evade taxes.

One of its weapons is the Offshore Tax Informant Program (OTIP). The CRA says the program’s tip line has resulted in signed contracts with more than 20 informants and more than $1 million in tax reassessments and penalties. The tips have resulted in audits of 218 Canadian taxpayers, some of which have been completed and some of which are still being conducted.

The CRA pays out a reward of between 5% and 15% of the money collected as a reward, but only when the money is collected. National Revenue Minister Diane Lebouthillier says some investigations into tax cheating can be complex and take years to complete. That may explain why the agency has yet to hand out a reward.

The tip line was started in January 2014 as governments around the world found themselves under pressure to curb offshore tax evasion following high-profile leaks of offshore tax records, such as the Panama Papers and banking records from Liechtenstein. That leak shed light on the extent of taxes that weren’t being paid.

Here are some of the ways the CRA hunts down big-ticker tax cheaters:

  • Reviewing cross-border electronic fund transfers. Canada requires financial institutions to report international electronic fund transfers totaling $10,000 or more to the CRA. This helps identify taxpayers who may be participating in aggressive tax avoidance or attempting to conceal income and assets offshore. Regarding offshore tax havens, there are currently over 750 audits and 20 criminal investigations underway. In three jurisdictions of concern, there are over 20,000 transactions in review worth over $7 billion.
  • Collaborating and sharing information with international partners. The government works with its international counterparts to coordinate strategies that will ensure that individuals and multinationals aren’t hiding assets offshore and that everyone pays their fair share. Canada has one of the largest treaty networks in the world, composed of 92 tax treaties, 22 tax information exchange agreements and the multilateral Convention on Mutual Administrative Assistance in Tax Matters. These treaties and agreements promote greater international cooperation through the exchange of information.
  • Taking part in BEPS to combat avoidance by big multinationals. Actions set in the Base Erosion and Profit Shifting Action Plan (BEPS) of the Organisation for Economic Co-operation and Development (OECD) aim to tackle international tax avoidance strategies used by some multinationals to inappropriately minimize their tax obligations, including schemes that artificially shift profits offshore. The CRA also has signed the Multilateral Competent Authority Agreement (MCAA) on country-by-country reporting. The stronger international reporting obligations for large multinational enterprises under that agreement enhance the ability of nations to ensure that the global operations of these enterprises are more transparent and that they pay appropriate amounts of taxes where they make their profits.

But, of course, individual tax evaders are in the CRA’s sights too. Among other areas where the tax agency looks for cheating are:

  • Social media. Some posts on Facebook or Twitter may prompt the CRA to look into a taxpayer’s financial life. Keep in mind, these posts aren’t always private. So if individuals who only report modest incomes post pictures of their new luxury cars, trips around Europe or elaborate winter homes in Florida, the CRA could see them and look into what they’ve declared as income.

    The CRA practices “risk-based compliance,” so for taxpayers identified as high risk, any relevant, publicly available information may be consulted as part of the agency’s fact-gathering. However, Privacy Commissioner Daniel Therrien and former assistant commissioner Chantal Bernier have criticized the practice and say the Treasury Board needs to draft guidelines to ensure no one’s privacy is invaded.

    Bottom line: Taxpayers should be careful about their social media privacy settings and what they post online. For example, if they a person files a tax return listing $50,000 in net income and show photos of anew yacht, an auditor may come calling.

  • Dealings on Ebay. The CRA can data-mine transactions on Ebay and similar sites that may turn up some taxable income. Sales may be considered dispositions of capital property, eligible capital property, personal-use property or inventory, each of which has different tax treatment. If the sales are determined to be business income, the value is included in income when determining whether individuals have reached the threshold where they must become GST registrants.
  • Small business’s sales data. For small business owners, the CRA can dive through years’ worth of credit card transactions with the aim of matching what a company says its sales were with the information the agency collects.Also, CRA agents may show up at a restaurant or other small business in disguise. They may order, say, a meal with the intention of sizing up how the business works and how many people frequent it. That can give them an idea about whether the operation seems to align with what was reported on previous tax returns.
  • Bank accounts and investments. The CRA can gain access to information from all Canadian financial institutions. By going through that, it can find undeclared, taxable interest, dividend and capital gains income. The tax agency can also see if individuals exceeded contributions to their Tax-Free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs).

    The over-contribution penalty on a TFSA is 1% a month on the amount of the excess. On an RRSP, generally, you have to pay a tax of 1 % a month on excess contributions that exceed your deduction limit by more than $2,000 unless you withdrew the excess amounts or contributed to a qualifying group plan.

    The CRA also hunts for disparities in retirement income. It can access information on bank account balances and income and match it with previous tax returns. If there’s a wide discrepancy, the agency is likely to start asking questions.

    Capital gains from “flipping.” Obviously, real estate flipping isn’t against the law. It’s a method of buying and selling real estate to earn income. Individuals may also use assignment clauses in real estate contracts to flip a property once (or more) before a final sale is made.

The CRA keeps a close eye on potential flipping and unreported capital gains (the difference between the purchase price and sale price). All the money made on real estate flips, including real estate commissions and capital gains must be reported to the CRA. Multiple property ownership where the taxpayer isn’t also declaring rental income is another trigger for investigation.

In another move, the CRA reportedly has started to fingerprint every person charged with tax evasion, which would restrict foreign travel for anyone accused but not necessarily convicted of a criminal tax offence. “The mobility restriction is an important deterrent, especially for people engaged in offshore tax evasion,” an internal memorandum reportedly says. If you have any doubts about the tax implications of your earnings or your investments, consult with your tax advisor to help ensure you stay in compliance with the law.

The Lowdown on Home Appraisals

Buying a home is likely to be the largest single investment you will ever make, and whether it’s your primary residence or a vacation home, you and your mortgage lender, will want to know that the value of the property is in line with the amount you plan to pay.


Preparing for an Appraisal of Your Home

If your house is being appraised, it is helpful to have certain documents available when the appraiser arrives, including:

  • The most recent assessment from your local Municipality Property Assessment Corporation.
  • A plot plan or survey of the house and land if available.
  • The date you purchased the property.
  • A list of personal property that will be part of the sale.
  • Title policy that describes encroachments or easements and any written property agreements, such as a maintenance agreement for a shared driveway.
  • A list of major home improvements and upgrades, when they were done, and how much they cost. Include permits if you have them.
  • A copy of the current listing agreement and broker’s data sheet and purchase agreement if a sale is pending.
  • Information on Homeowners Associations or condominium covenants and fees.
  • A list of proposed improvements if the property is to be appraised “As Complete“.

You don’t need to accompany the appraiser during the inspection, but you should be available to answer questions and point out any improvements.

Make sure all areas of the home are accessible, including the attic and crawl space.

This is where an appraisal comes into play. A real estate appraisal provides an estimate of the fair market value of a property and it can make the difference between getting that mortgage and having the financing fall through.

But there are other reasons you may want to have your home appraised, such as:

  • Lowering your tax burden;
  • Establishing the replacement cost of insurance;
  • Settling an estate or divorce;
  • Satisfying a government agency request, say for tax purposes, or
  • Providing evidence in a lawsuit.

Mortgage lenders require appraisals to ensure that a property is worth the amount they are lending. Then, if a borrower defaults, the lender knows there is adequate collateral to recoup the initial investment.

As the potential buyer, you’ll pay for the appraisal. Costs vary widely, depending on the house, the province, the geographic location and the scope of the report.

Appraisers start by viewing the property inside and out to ensure that it is in a condition that a reasonable buyer would expect. The appraiser looks for any obvious features — or defects — that would affect the value of the house.

Once the site has been inspected, the appraiser employs one of two common methods for evaluating properties that are to be used only as personal residences and not to generate rental income.

Cost Approach

The appraised value is determined by combining the value of the land with the estimated reconstruction cost of the home minus accrued depreciation. This method is most useful for new properties, where the costs to build are known.

The appraiser takes data on local building costs, labor rates and other factors to calculate the cost of building a home similar to the one being sold. The appraisal often sets an upper limit on what price the property could fetch. Such mitigating factors as location and amenities are usually not reflected in the cost approach.

If the appraisal comes in lower than the amount you were planning to finance, the bank isn’t likely to provide the full amount you were hoping for. Depending on your contract with the seller, you may be allowed to back out of the purchase deal or make a lower offer.

You could make a larger down payment in order to secure a mortgage the lender would be willing to extend, but then you risk spending more cash than makes you comfortable. If the appraisal comes in higher than expected, the seller generally does not have the right to raise the asking price.

Sales Comparison Analysis

This method compares the attributes of the home for sale with existing houses in the area that have similar attributes and have recently been sold. No two properties are exactly alike, so the appraiser compares the comparable properties to the home you are interested in, making adjustments to make the comparable homes’ features more in-line with the listed property. The result is a figure that shows what each comparable home would have sold for if it had the same features as the listed property.

Using knowledge of the value of such features as square footage, extra bathrooms, hardwood floors, fireplaces and view lots, the appraiser adjusts the value of the comparable home. For example, if a comparable property has a fireplace and the home you want does not, the appraiser may deduct the value of a fireplace from the price at which the comparable home sold. If the house you are looking at has an extra half-bathroom and the comparable home does not, the appraiser might increase the price of the other property.

This approach is generally considered the most reliable if adequate comparable sales exist.

In most instances when the cost approach is involved, the appraiser actually uses a mix of the cost and sales comparison approaches. For example, while the replacement cost to construct a building can be determined by adding the labor, material, and other costs, land values and depreciation must be derived from an analysis of comparable data.

If you are looking for an appraiser on your own, ask your real estate agent or use the search function on the website of the Canadian National Association of Real Estate Appraisers.

When Expectation Becomes Intention

Owning rental property has long been a popular investment, particularly when losses from the property can be deducted against other income. However, Canada Revenue Agency (CRA) sometimes attacks rental-related expenses and denies the deductions.


The Landmark Cases Stewart v. The Queen.

The taxpayer invested in four condominium units and the investment had no element of personal use.

He incurred losses from the beginning because the purchase was financed almost entirely with debt and he had significant interest expenses. Losses were projected to continue for up to 10 years. The CRA disallowed the losses using the “reasonable expectation of profit” test, arguing there was no source of income. The deduction for interest expenses was also disallowed.

The Supreme Court of Canada ruled that Stewart was entitled to deduct his losses since his rental property lacked any element of personal use and was clearly a commercial activity.

Walls v. The Queen. A limited partnership invested in a warehouse business. The partnership paid service charges, management fees, and 24% annual interest on the purchase price of $2.2 million.

The taxpayers then deducted their share of the losses. The CRA again disallowed the losses based on real expectation of profit but the Supreme Court ruled:

” . . . there was no evidence of any element of personal use or benefit in the operation. Where, as here, the activities have no personal aspect, reasonable expectation of profit does not arise for consideration. Although the respondents were clearly motivated by tax considerations when they purchased their interests in the partnership, this does not detract from the commercial nature of the storage park operation or its characterization as a source of income.”

Over the years, a number of special provisions have been introduced into the Income Tax Act to limit taxpayers’ ability to claim rental losses. For example:

Regulation 1100(11). Under this provision, a rental loss can’t be created or increased by claiming the Capital Cost Allowance (CCA). All rental properties owned are pooled for purposes of this regulation. The result is that a taxpayer can only claim the CCA if total rental revenue exceeds total rental expense, and then, only enough to reduce income to zero.

Subsection 13(21.1). When land and buildings are sold together, any terminal loss on the building is reduced to the extent of any capital gain on the land. So, you can’t manipulate the amount of the deduction of a terminal loss at 100% and report a capital gain taxable at 50%.

The tax agency also has a long history of denying rental losses due to a taxpayer having no “reasonable expectation of profit”. But in two Supreme Court rulings described in the right-hand box, the court struck down the expectation of profit test and said the tax agency should use a two-pronged approach to losses:

    • If the taxpayer’s activity is “undertaken in pursuit of profit,” the income is deemed to be from a business or property and losses will be allowed. Where there is no personal element, the CRA shouldn’t second guess a taxpayer’s business decisions.


  • If the enterprise has a personal element, the tax auditors must consider whether the taxpayer had an “intention to profit” from a business operated in a “sufficiently commercial manner.” (Stewart v. The Queen, 2002, SCC 46 and Walls v. The Queen, 2002, SCC 47).

While “sufficiently commercial” wasn’t defined, all circumstances surrounding the activity should be considered in making that determination.

So Finance Canada added a more restrictive and onerous test aimed at eliminating many real estate investments (including tax shelters). A loss on a property is only allowed if it is reasonable to assume that the taxpayer will realize a cumulative profit from the property during the time the taxpayer has held, or can be reasonably expected to hold, the property.

In addition, the expected profit has to come from renting the property. It can’t come from a capital gain due to the increase in value of the property. The legislation specifically provides that there is no source of income from capital gains, and therefore no profit from a capital gain.

The test is to be applied every year a loss is deducted. On the other hand, if the property starts to make a profit – even if there previously had been no reasonable expectation of profit – the profit will be taxable in the year it is made. (It doesn’t appear a taxpayer will be allowed to go back and amend prior years’ returns to deduct losses not previously deductible.)

If you have leveraged investments in real estate where the rental revenue isn’t expected to exceed the expenses for many years, consult with your advisor and review these four points:

1. Have there been profits or losses in the past?

2. How does your training and background affect the situation?

3. What is your profit intention?

4. Is there any personal element? For example, do you or family members use or reside on the property?

Claim a Capital Gains Reserve and Defer Taxes

lores_capital_gain_kkCapital gains on sales of property other than your principal residence can be a significant tax cost in the year of the sale.

Whenever you dispose of capital or other property, principal residence aside, you need to report a capital gain when the sale price is more than the purchase price. When the property’s value is high the capital gain can add a significant amount to your tax liability. However, with some tax planning you can either defer or reduce the amount of capital gains.

Where you have a capital gain on the sale of property, you may be able to defer part of the capital gain by claiming a reserve. You may claim a reserve in cases where you receive payment of capital property over several years. The reserve allows you to defer payment of taxes on capital gains until the full proceeds are received.

For example, you sell a capital property for $100,000 and the terms of the sale prescribe that the buyer will pay $20,000 initially and the remainder in equal instalments of $20,000 over the next four years. In this case you may be able to claim a reserve.

Generally you can claim the reserve on the disposition of capital property unless you:

  • Were not a resident of Canada at the end of the tax year of the sale of at any time in the following year;
  • Were exempt from paying tax at the end of the tax year or at any time in the following year;
  • Sold the capital property to a corporation that you control in any way.

Calculating the Reserve

If you are eligible to claim a reserve, the general formula for calculating it is:

The total gain (in excess of cost) divided by the total proceeds of the disposition multiplied by the amount payable after the end of the year.

Using our example, and assuming the original cost of the property was $60,000, the reserve that can be claimed in the year of the sale is calculated as:

$40,000 (excess of original cost) divided by $100,000 (sale price) multiplied by $80,000 (amount payable in the following year, for a reserve of $32,000. [$40,000/$100.000 X $80,000 = $32,000.]

When you report the capital gain on your tax return, you calculate it as proceeds of disposition of capital or other property minus the cost of the property, which is the full $40,000. Then you deduct the reserve for the year.

The remaining amount is the portion of the capital gain that you need to report in the year you made the sale. The reserve is reported on the Form T2017, Summary of Reserves on Dispositions of Capital Property.

In the following year you will have to include the reserve in the calculation of capital gain for that year. That means you will have to include the $32,000 reserve when you calculate capital gains on the income tax return for the year after the sale. You will have to calculate a new reserve for that year.

20 Per Cent Rule

For capital and other assets disposed after November 12, 1981, reserves are permitted only for a limited number of years. The limitations are the following:

Sale of capital assets: Generally, the maximum period over which most reserves can be claimed is five years. However, the rules specify that in any year the reserve should be a lesser of the amount calculated using the general formula above and 20 per cent of the total capital gain in the year of disposition, 40 per cent of the capital gain in the following year and so on. As a result, in each year the reserve is claimed, the general calculation and the 20 per cent rule must be compared.

In other words, you do not have to claim the maximum reserve in a tax year. However, the amount you claim in a later year cannot be more than the amount you claimed for that property in the previous year.

Note: Transfers to your child of family farm property, family fishing property, and small business corporation shares, as well as gifts of non-qualifying securities have an identical rule with a 10 year period.

Sale of ordinary assets resulting in business income: If you disposed of an asset in the normal course of the business and it generates ordinary business income, the maximum period to claim the reserve is reduced to three years. In this case the reserve will be the prorated portion of the profit that is due in each of the three years.

Reserves that you can claim on disposition of capital property can be a useful tool in terms of tax planning. Tax deferral and reserves can be used to reduce the overall tax on a large capital gain transaction as individual tax rates increase with the amount of income earned. However, if the proceeds are deferred over a long period of time the taxes may be due before the money is received. Make sure you have enough money to pay the taxes.

If you sell a capital or other property for a capital gain, consult with your accountant about making sure that you are taking advantage of all the possible tax planning points.