Author Segal LLP

CIBC Poll: The Majority of Parents Misunderstand Tuition Costs

090816_thinkstock_112808460_lores_kkDo you have kids in college or at university and have discovered you underestimated the cost and wish you’d saved more?

You aren’t alone. A recent survey for Canadian Imperial Bank of Commerce (CIBC) shows that while eight out of 10 Canadian parents claim they have a good understanding of the costs associated with a post-secondary education, almost 75% don’t really grasp the actual cost of tuition.

What’s more, almost 40% of respondents admit they don’t know what to budget for their children’s non-tuition costs, such as books, accommodation and living expenses. And many fundamentally don’t know how Registered Education Savings Plans (RESP) work, although many have set one up for their kids.

The poll showed that:

  • As many parents underestimate yearly tuition (25%) as overestimate it (22%), with another 27% saying they don’t know how much it is.
  • One in five (19%) believe their children can get by on less than $500 a month (the mean estimate for non-tuition costs was $1,333 a month).
  • The majority (81%) say they have a good understanding of the overall cost of post-secondary education, yet only 20% correctly estimate tuition at between $6,000 and $9,999. According to the most recent data from Statistics Canada, tuition ranges from as low as $2,660 in Newfoundland and Labrador to a high of $7,868 in Ontario.

“With parents not really knowing what the costs are, it’s not surprising that so many students end up treating their parents like ATMs once they’re in school,” said Kathleen Woodard, Senior Vice President, Retail and Business Banking, CIBC. A CIBC poll in August 2015 found that more than half of post-secondary students tapped their parents for additional financial support while at school because they ran out of money.

Parents’ Regret

The recent poll found that 39% of parents with children enrolled or recently graduated say it cost them more than expected, while 46% admit that in hindsight they should have started saving earlier.

In reality, it can cost at least $100,000, or $25,000 a year, for one child to go away to college or university for four years, Woodard says. Financial advisers generally say it’s important to start early and put aside as much as possible.

Not only are parents surprised by these costs, they lack a fundamental knowledge about the RESPs they set up to save for their kids’ post-secondary education. While 76% of parents have an RESP,

  • 53% think their contributions are tax deductible (they aren’t).
  • 45% think the money is only for tuition (it can be used for any purpose related to education, including general living expenses).
  • 31% aren’t aware that they can catch up on claiming missed Canada Education Savings Grants (CESGs).
  • 65% mistakenly believe the last year to make a RESP contribution is the year your child turns 17 years of age (it can be until the child turns 31).

The Basics

If you have children you hope will pursue a post-secondary education and you want to help, here are RESP basics to help get you started:

There are two parts to an RESP:

1. Contributions, which are the amount you put into the plan, and

2. Accumulated income, which encompasses everything else, such as grants, capital gains, interest payments and dividends.

When you make a withdrawal, specify whether you want it to come from contributions, accumulated income or both. Contribution withdrawals can be sent to you or the student. Those from accumulated income generally must be sent to the student unless he or she agrees the money can go to someone else.

Accumulated Income Withdrawals

1. They’re taxable in the student’s hands (contribution withdrawals aren’t taxed). Most students may owe little or no tax, including on summer and part-time jobs, as they generally have low incomes and are entitled to various tax credits.

2. There’s no withholding tax. It’s up to you to keep track of the tax due. Your RESP provider will issue a T4A slip for any distributions during the year.

3. The government generally restricts withdrawals for full-time students to $5,000 in the first 13 weeks of a program. There are no limits after that if the student remains enrolled. Withdrawals for part-time students are limited to $2,500 for every 13-week enrollment period (there are no limits on contribution withdrawals).

4. Withdrawals must be used to further your child’s post-secondary education. But this includes tuition, fees, textbooks and reasonable costs for moving, rent, food and transportation. Your RESP provider generally determines what are considered reasonable expenses.

5. For both full- and part-time studies, payments can last for as long as six months after the end of a student’s enrollment, if your plan allows this.

How Much Should You Withdraw?

Withdrawing from an RESP isn’t as convenient as withdrawing from your chequing account. Consider taking out enough money to keep the student going for awhile. But you may want to provide the money in regular payments rather than a lump sum, as your student may not be as financially savvy as you. If the student is in a co-op program and has two work terms and one school term in the year, it may make more sense to withdraw contributions rather than accumulated income in that year.

Important note: One smart move is to deplete accumulated earnings first. Contributions remaining in the plan are yours to use as you wish. You can transfer them to another child’s plan or withdraw them for personal use.

If there’s accumulated income left in the plan, you may have to refund some CESG funds. You may have to repay CESG money in other situations, too, such as when a beneficiary doesn’t pursue higher education or the plan is terminated.

The government adds the grant money to your RESP. The basic grant gives 20% on every dollar you contribute, up to a maximum of $500 on an annual contribution of $2,500. That’s 20 cents on every dollar. Contributing at least $2,500 for each child will maximize the grants.

Grant room accumulates until December 31 in the year a child turns 17. If you can’t make a contribution in any given year, you can catch up in future years.

Depending on your net family income, you could receive an additional CESG, but if your family’s net income exceeds $90,563, you aren’t eligible. Keep track of the CESG money; you’ll have to repay any money exceeding the $7,200 lifetime limit.

There are no annual limits on your contributions, but there’s a lifetime limit of $50,000 for each child. And keep in mind that various provincial governments also have incentives for education savings that are administered through RESPs.

What if Your Kid Child Isn’t Interested in School?

If your child doesn’t want to pursue a post-secondary education, you have options for what to do with the money. Some may involve costs and tax consequences. Here are six possibilities:

1. Keep the RESP open for awhile. In a year or two, your child may decide to go to school after all. An individual or family plan can stay open for 36 years — 40 years for beneficiaries eligible for the disability tax credit.

2. Transfer money between individual RESPs for siblings tax-free (including any CESGs) if the child who benefits was under age 21 when the plan was opened. You may also have the option of transferring the money to another beneficiary, but consult with your financial advisor about this option and be sure you don’t over-contribute.

3. Pay for the education of another child in a family RESP.

4. Change beneficiaries or transfer the plan to another beneficiary if you have a group plan that allows this.

5. Transfer as much as $50,000 tax-free to your Registered Retirement Savings Plan (RRSP) or a spousal RRSP if:

  • The RESP has been open for at least 10 years,
  • All beneficiaries are at least 21 years old and aren’t currently pursuing a higher education,
  • You’re a Canadian resident, and
  • There’s enough contribution room in the RRSP.

6. Transfer the RESP to a Registered Disability Savings Plan on a tax-deferred basis if certain conditions are met. Any CESG money would have to be repaid to complete the transfer.

Of course, you could collapse the plan and the contributions would be tax-free. You would have to refund all grants and the accumulated income would be added to your gross income and taxed in your hands as ordinary income at normal tax rates — plus an additional 20%.

All of the complexities of RESPs go beyond the scope of this article. It’s in your best interest to consult with your financial advisor about the best strategy for making withdrawals.

Steps to Help Ease Your Debt Burden

Debt can sometimes seem like a weight that can never be lifted.


Pull the Reins on Your Other Debt Obligations

Your mortgage is not the only debt that may be weighing you down.

To illustrate, add up your total monthly interest payments, including credit cards, lines of credit, mortgages and car loans and consider what else you could be doing with that money.

Here are some tips to help you take control of your finances:

Pay down high-cost borrowings. Apply as much as you can to high-interest, unsecured and non-tax deductible debt first. This can help double up your mortgage payments. Use any source of extra cash. If you expect a tax refund, spend it on bills. If you expect a raise, don’t increase your standard of living, lower your debts. See if you can trim household spending and use the extra cash on your credit card bills.

Pay as you go. Use your credit card like a charge card. Pay it in full monthly. You can still maximize reward points while avoiding interest. Never pay one credit card with another. If you really need to reduce your debt load quickly, consult with your adviser to see if a low-rate line of credit would make sense.

Pay yourself first. Find an online bank with a good interest rate on savings and transfer money from your chequing account each time you get paid. Just $20 a week will give you $1,040 in a year, plus the interest.

If you are one of the Canadians whose debt-to-income ratio is too high, you may find that you are not able to keep up payments on your mortgage and other debts. If this is the case for you or someone you know, here are can help control mortgage debt:

1. Stress-test your budget: You must be able to afford your mortgage. Rule of thumb: Total housing costs, including mortgage, property taxes, and heating costs, should add up to no more than one-third of your household income. Test your budget using a mortgage payment based on a higher rate.

2. Carefully weigh fixed vs. variable-rate loans: Variable-rate mortgages are touted as a winning strategy over the long term because they generally cost less in interest and become even cheaper as rates fall. But in order to pay less than those with fixed-rate home loans, you take on the risk of escalating borrowing costs. Consider what would happen if payments doubled over the next few years as interest rates inevitably start to rise.

Fixed-rate mortgage payments, in contrast, are not affected by rate increases so you always know what you will pay over the term of the loan. Typically, you can switch to a fixed-rate from a variable-rate without penalty.

3. Make a larger down payment: Before taking out a mortgage, try to pay off short-term debt. Then put as much as possible up front on your mortgage.

The larger the down payment, the less interest you will pay over the life of the loan. Aim for at least a 20 per cent down payment to avoid having to buy default insurance.

4. Choose your amortization wisely: A longer amortization may mean lower mortgage payments, but it also means more interest. Be disciplined about paying down the mortgage as quickly as you can.

Try to refinance to a shorter amortization as soon as possible. The sooner you are mortgage-free, the quicker you can build your retirement savings.

5. Maximize your payments: Your lender will let you pay more than required to service your loan. The extra amount will vary by institution, with some even allowing you to double your scheduled payments.

In addition, consider taking advantage of prepayments when possible. The extra payments are applied directly to the principal of the mortgage, reducing the loan’s balance outstanding.

6. Use equity lines of credit cautiously: If the value of your home is higher than the amount you owe, you can apply for an equity line of credit, although the government will not insure it. These and other credit lines can be useful for financial emergencies, but they add to your debt burden.

If you take one out, be sure you have a plan to pay it down as quickly as possible. In the event of a short-term cash crunch, your lender may offer alternatives, such as withdrawing funds from your extra payments or skipping a mortgage installment.

Consult with your financial adviser, who can help you decide how much you can comfortably afford when buying a first home, trading up or looking to refinance. Your adviser can also help you to identify how borrowing strategies can play a role in achieving your financial goals and offer solutions that make sense in your situation.

CRA Has Its Sights on Rental Income

lores_rural_land_use_country_fence_ranch_farm_property_tkInvesting in condominiums operated as hotels — where you own individual units that are often split into one-quarter shares — can present some income-earning opportunities, but they can be complicated when it comes to GST/HST.

If you are considering one of these investments, keep in mind that you must pay 5% GST; 13% HST on the purchase price and cannot claim the GST/HST new housing rebate because neither you nor your family will occupy the unit. Nor can you claim the GST/HST Rental Property rebate, because the unit is not rented out on a long term basis.

However, if you are a GST/HST registrant, you can buy the unit without paying the GST/HST. This is because when a property is used 90 per cent or more for commercial purposes, a GST/HST-registered buyer can claim an input tax credit equal to the GST/HST paid on the purchase.

There a few issues you should keep in mind related to owning short-term rental condos to help ensure you stay within tax law and survive potential audits of this favorite CRA target:

1. Rentals for fewer than 60 days aren’t characterized as residential complexes, which are exempt from GST/HST. Instead they are usually characterized as “hotel, motel, inn or boarding house, lodging house and other similar premises.” That means GST/HST is charged on the rentals and you can claim input tax credits on GST/HST paid on expenses relating to them.

2. If you or your family does stay in the unit, you will have to allocate a portion of the input tax credits as personal. That portion cannot be claimed as input tax credits, even if they are related to the purchase of the unit. When personal use is more than 50 per cent, you cannot claim any input tax credit on the purchase price.

If you do want to stay in the condominium complex, say for a vacation, you are generally better off staying in another unit and paying rent or arranging a swap with another unit holder. In the latter case, you both report rental revenue on the use of each other’s units.

3. Management companies who typically run these complexes do not claim input tax credits on expenses related to the units, although they do usually collect and remit GST/HST on the unit rentals. The companies will send you monthly reports on revenues and expenses. In addition, the management companies normally take care of renting units, the day-to-day operations of the complex and other routine matters.

Your record keeping is minimal, generally consisting of keeping the management company’s annual report to you and retaining receipts for expenses associated with the rental unit.

Here is an illustration of the types of expenses that are usually incurred and the GST/HSTrefund that would result if you were registered for GST/HST:

Expense ($)

Input Tax Credit ($)

GST/HST self assessed on purchase — $5,000


Unit purchase, GST/HST offset by tax credit



Net GST/HST payable on purchase price


Costs typically subject to GST/HST and refunds registered owners can claim



  • Legal costs on purchase
  • Management fees
  • Maintenance and Repairs
  • Travel
  • Strata Fees













The refund depends on the amount of GST/HST paid out. The more expenses are subject to GST/HST, the greater the refund.

One final caution: You must be registered for GST/HST before the sale closes, or you cannot claim the input tax credit on the purchase. Talk to your tax professional before you purchase the unit if you think that you might benefit by registering for GST/HST.

Red Flags for a CRA Audit

thmb_red_flag_risk_danger_mbYou might think the Canada Revenue Agency (CRA) would keep silent about what triggers an audit. But the agency is actually quite candid about why it chooses certain tax returns.

For example, the CRA publishes newsletters, technical interpretations and taxpayer alerts on its Web site that elaborate on audit issues, describe areas of concern to the government, and warn about actions and investments the agency is likely to investigate.

In addition, the Auditor General of Canada has issued a report titled “Verifying Income Tax Returns of Individuals and Trusts,” which discusses in detail how the CRA processing and review system works.

Red Flag

Potential Solution

Gross profit margin is lower than direct competitors — or higher — while net profit is lower. Properly record and categorize expenses.

Ensure the accuracy of direct and operating costs, as well as inventory valuation.

High vehicle expenses Keep a vehicle log.
Unusual home office business expenses Determine the business use of your home on a consistent and defendable basis.
Small Business Deduction: High “other revenue” or investment revenue. Large cash balance on balance sheet. Pay dividends to remove excess cash from the corporation. Repay shareholder loans. Consider forming a separate holding company for investments.
Income is low for many years. Report all income, including non-taxable sources.

With all that information, it’s generally easy to determine some of the transactions and recording methods that are likely to prompt an audit.

Here are 10 red flags gleaned from these documents to help you gauge whether your tax return is likely to trigger an audit:

1. Revenue discrepancies. A sure-fire trigger for an audit is reporting revenue on your GST return that doesn’t match what you report on your income tax return. Report all revenue on your GST return, even if you don’t collect the tax on some revenue.

Treat revenue and expenses the same way on both returns. For example, when filing your income tax return, don’t reduce revenue by the associated expenses and report only the profit while reporting total revenue on your GST return.

In addition, the CRA annually matches information on tax returns with information provided by employers, financial institutions, and other third parties. The tax returns of individuals who are married or living common law are also compared with their spouses’ or partners’ returns.

These comparisons are made to identify unreported income, incorrect claims for an amount of “income tax deducted,” credits and deductions that exceed the limits, net family income for the purpose of claiming several credits as well as incorrect “pension adjustments.”

2. Claiming large interest and carrying charges. A taxpayer with business or rental income should claim related accounting fees and interest expense on the business or rental income schedule. They should not be claimed as carrying charges and interest expense. This deduction is for expenses related to investment income.

3. Changes in shareholder loans and large balances. If you hold stock in a corporation, large changes in shareholder loans or debit balances can attract attention. The CRA is looking for personal expenses recorded as business expenses and loans taken from a company. Your accountant can advise you about the best way to structure loans.

4. Deducting large business expenses. The CRA scrutinizes business and rental income schedules that show large amounts of advertising and promotion, travel, miscellaneous and interest expenses. The tax agency is looking for personal expenses, meals and entertainment that are improperly recorded and non-deductible expenses such as penalties and interest. Meal and entertainment expenses should be separated and expenses should be allocated individually rather than using “miscellaneous.”

5. Making calculation errors or leaving out information. Many audits result from simple math errors on tax returns or missing information slips, such as the T3, T4, and T5. Professionally prepared tax returns that minimize audit red flags are one of the many benefits of using a qualified accountant.

6. Large or unusual changes in deductions or credits. Employment expenses are limited to just a few people and large employment expenses are a flag for the CRA. Moreover, you may be requested to supply additional information if you have claimed childcare or tuition expenses.

7. Large charitable donations of cash exceeding $25,000 and capital property are often reviewed.

8. Investment gains and losses. The CRA will closely look at losses claimed on investments in small business corporations. The rules are complex and often misunderstood or misinterpreted. Many taxpayers also don’t correctly track capital gains and losses, so they, too are an audit flag. Account statements from financial institutions may not be accurate for tax purposes. Income trusts, for example, erode their cost base over time because of returns of capital. Foreign currency investments can present a problem as you need to account not only for your financial gain or loss but also for the foreign exchange gain or loss.

9. Foreign tax credits. These claims may trigger an audit for investors who earn income from foreign investments or employment.

10. RRSP overcontributions. If you overcontribute to your Registered Retirement Savings Plan, taxes are owed on the excess. Over contributions are common when retirement allowances are deposited into the accounts and when taxpayers contribute to their plans without referring to their annual Notice of Assessment.

Steps to Avoid Higher Tax on Sales of Goodwill and Other Intangibles

090216_thinkstock_483447992_lores_kkIf you own a business and you’re planning an exit strategy or asset sale, you may want to complete it by December 31.

Starting January 1, 2017, changes to the Income Tax Act brought about by the Liberal’s Budget 2016 will modify the way the government taxes asset sales. The change is meant to simplify the rules; it creates a new capital cost allowance (CCA) category (class 14.1) and essentially merges eligible capital property (ECP) into the depreciable property category.

As a result, your incorporated business will pay an additional refundable tax when it disposes of goodwill or other ECP. That tax isn’t refunded until taxable dividends are paid to shareholders.

ECP includes goodwill, customer lists, franchise rights, farm quotas and other intangibles. The costs of incorporation, reorganization or amalgamation also qualify.

If you own, say, a small Canadian-controlled private corporation, goodwill may be the single largest asset you’ll have to sell and it could be hit with a big tax liability. If you’re a dairy farmer who wants to sell quota held in a corporation, you’ll pay an extra tax on the gain in value.

Because of changes in the treatment of ECP, owners considering the sale of their corporations (or any ECP) might want to consider the advantages of:

  • Selling the assets before the end of the year, or
  • Crystallizing certain gains accrued on the assets through a corporate reorganization.

Here’s How It Works

Some capital expenditures are neither deductible from taxes as a business expense nor treated as a capital property subject to depreciation under the CCA rules. These expenditures are those a company pays out to acquire certain ECP in order to earn business income.

Currently, the taxation of ECP works this way:

1. 75% is included in a cumulative eligible capital (CEC) pool,

2. An annual deduction of 7% of the CEC pool on a declining balance basis may be deducted from active business income related to the ECP,

3. 50% of any gain from the disposition of ECP is taxed at the lower tax rate applicable to active business income, and

4. The remaining 50% is captured in a corporation’s capital dividend account and can be paid out to shareholders tax free (creating a significant tax deferral).

Income from most businesses qualifies as active business income, except when the money comes from a specified investment business, a personal services business or it’s investment income. The latter includes taxable capital gains less allowable capital losses, property income less property losses and foreign business income.

Starting January 1, ECP taxation of ECP will change so that:

1. 100% acquired on or after that date will be considered depreciable property,

2. An annual deduction of 5% will apply to ECP on a declining basis, and

3. Gains from the disposition of ECP will be taxed as investment income in the form of capital gains resulting in a higher tax liability.

So, under the new rules, you’ll no longer be able to take advantage of the tax deferral on captured gains and the effective tax rate on gains on goodwill or other ECPs could double, depending on your province. (If you sell your corporation for shares, the new ECP rules will have no effect on the tax cost of the sale.)

What Could this Mean for Your Business?

There are two ways to structure a business sale transaction: an asset sale or a share sale.

Buyers generally prefer asset transactions as they carry less risk and the buyer can cherry-pick which assets it will purchase and which liabilities it will assume. Also, the buyer needn’t take on non-union employees, unless the seller requires it, and there’s more complex paperwork.

Sellers, on the other hand, often prefer share sales, because all assets and liabilities are transferred, employees generally continue working and the paperwork is less cumbersome. Stock transactions also offer a lower tax rate on capital gains and the potential to shelter a portion of the proceeds from tax through the shareholders’ lifetime capital gains exemption.

With the new rule in place, sellers may be even more motivated toward share sales. Purchasers who wish to proceed with an asset sale may have to compensate the seller for the additional tax costs associated with the deal. Likewise, sellers may become more selective when considering competing offers.

The remainder of 2016 is the last window of opportunity to sell your business in an asset sale (or a hybrid transaction that involves the sale of assets and shares) where the lifetime capital gains exemption is available to shareholders. This would allow your corporation to benefit from the deferral opportunities provided by the current ECP regime.

What to Do?

If you’re considering a full or partial sale of your business after the rules change, take into account these three issues:

1. Determine how much of your business value is goodwill and other eligible intangibles, and thus subject to the higher tax rates. If they don’t amount to much, no immediate action may be necessary.

2. Review your corporate structure. Changes to your business structure may allow you to shelter some of your capital gains from tax if you decide to sell after January 1.

3. Consider taking steps to crystallize your gains related to ECP. You may be able to have some of the gains taxed at the current rates, which will reduce the impact of potential taxes on a sale that takes place after January 1.

A sale is complex and requires careful planning — particularly with the changes coming down the road. Consult with your tax advisor for detailed information on the changes, how they’ll affect your corporation and the best steps to take moving forward.