The Underused Housing Tax (“UHT”) is a new Federal tax of 1% on the value of vacant or underused housing in Canada that took effect on January 1, 2022. In reading that first line, you probably think this doesn’t apply to you. Think again. Think of penalties of $5,000 for individuals and $10,000 for corporations.
There are many situations where there will be an exemption from this 1% tax, but you’d still be required to file the new UHT annual return (UHT-2900) or be assessed those penalties. We’ve heard of many cases in the past where people have been assessed a $1,500 penalty for not filing a T1135 form reporting their foreign assets, even though they declared all the income on those foreign assets. So don’t assume CRA won’t assess those penalties, just because you qualify for an exemption from this tax. There are many details about this new tax and its exemptions. Here are a few key points to consider: Only residential properties are affected – detached or semi-detached homes that contain 3 dwelling units or less; a townhouse; a condo; duplexes and triplexes.
Canadian citizens and permanent residents qualify for an exemption from the 1% tax and filing of the annual return – but this exemption doesn’t apply if you are a partner of a partnership, or a trustee (other than a personal representative for a deceased taxpayer).
There’s no exemption from filing the return for private corporations.
Don’t confuse this tax with other “vacancy” taxes on residential properties that are provincial or municipal-based. This is a federal tax.
There is no time limit for the CRA to assess the UHT, penalties, and interest. The first UHT return is due on April 30th, 2023, for residential properties held as of December 31, 2022.
Contact your Padgett advisor to discuss your situation.
RRSP Contributions March 1, 2023, is the deadline to make RRSP contributions to be eligible for a deduction in your 2022 personal tax return. Contributions made after this date will not be deductible against 2022 income. The contribution limit for 2022 is $29,210 although this may be less if you have an employer-provided pension plan or deferred profit-sharing plan. Your overall contribution room may also be reduced if you overcontributed in prior years, or higher if you haven’t maximized your past years’ RRSP contributions. There is only a $2,000 margin for overcontribution errors. Beyond this amount, you will have to pay a 1% per month penalty tax on overcontributions. You should review your RRSP contribution room on the Notice of Assessment for your 2021 tax year issued to you by the Canada Revenue Agency (“CRA”). TFSA Limit The Tax-Free Savings Account limit was increased to $6,500 for 2023. Be sure to track your TFSA contributions since there are penalties for overcontributions and there’s no margin for error like with the RRSP. Although CRA does keep track of your TFSA contribution room, information on contributions you make to your TFSA is not automatically uploaded to CRA by your financial institution. The CRA receives this information only annually and it takes time for CRA to process this information. So be careful of this timing delay if you are verifying your TFSA contribution room through the CRA portal “My Account”.
First-time home buyers tax credit – also known as the Home Buyers Amount. This credit will be doubled from $5,000 to $10,000 as of 2022. At a 15% tax credit rate, this translates into $1,500 of tax savings for qualifying home buyers. You are a “first-time” home buyer if neither you nor your spouse/common-law partner, owned a home in the year you bought the new home, nor in any of the previous 4 calendar years. If you have a disability, you might not have to be a “first-time” home buyer to qualify if the reason for the new home purchase is to live in a home that is more accessible and suited to your needs. Be sure to advise your Padgett accountant if you bought a home in 2022 and you think you may qualify. Also, be sure you’ve advised CRA of your change of address. Home Accessibility Credit – this credit has also doubled. The amount of expenses eligible for credit for 2022 has increased from $10,000 to $20,000. At the 15% tax credit rate, this converts to $3,000 of tax savings on eligible expenses. This credit is to assist individuals to gain access to, or to be more mobile or functional in their dwelling, or reduce their risks related thereto. Modifications will generally qualify if the individual qualifies for the disability tax credit or is 65 years or older.
These expenses can be paid on behalf of yourself, or in some cases for certain dependents. The expenses should be of an enduring nature and integrated into the home. In general, if the item purchased will not become a permanent part of the home, it is not eligible. Of course, detailed invoices, agreements, and receipts need to be kept should the CRA want to verify the claim. The expenses will not be reduced by any federal or provincial government assistance provided. Examples of qualified renovations include grab bars and handrails, walk-in bathtubs or wheel-in showers, wheelchair ramps, widening doorways for wheelchair accessibility, or lowering existing counters and cupboards among others. The expenditures may also qualify for the medical expense tax credit, and some provincial credits as well (British Colombia, Ontario, New Brunswick, and to a lesser extent Quebec) – a potential double or triple claim.
Multi-Generation Home Renovation Tax Credit – this is a new tax credit effective January 1, 2023. Its purpose is to help taxpayers to care for adult relatives in their own homes by providing some tax relief on expenses incurred to build a secondary suite for the family member who is a senior, or an adult who has a disability, to move into. The secondary suite must be a self-contained housing unit that has a private entrance, kitchen, bathroom, and sleeping area. Additionally, the home being renovated must be inhabited or reasonably expected to be inhabited within 12 months after the end of the renovations. Routine repairs, appliances, electronic home-entertainment systems, security monitoring, housekeeping, and interest costs relating to the renovation won’t qualify for the credit. The tax credit is 15% of the expenses, a maximum of $50,000, which works out to a maximum credit of $7,500. The credit is also refundable. This means that if the tax credit is more than your taxes payable, you will get a refund.
In Budget 2022, the federal government proposed the Tax-Free First Home Savings Account (FHSA). The most recent draft legislation has proposed April 1, 2023 as an effective date. Here is a summary of this new registered plan which is based upon the draft legislation to date:
The FHSA gives prospective first-time home buyers the ability to save $40,000 on a tax-free basis. It’s a bit of a hybrid between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Contributions would be tax-deductible like an RRSP, and withdrawals to purchase a first home – including the investment income earned in the plan – would be non-taxable, like a TFSA.
To open a FHSA, you must be a Canadian resident who is 18 years of age or older. In addition, you must be a first-time home buyer. This means neither you nor your spouse has owned a home in which you lived in the year the account is opened or in the preceding four calendar years.
The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. You can claim an income tax deduction for contributions made in a given year. Unlike RRSPs, contributions made within the first 60 days of a given year could not be attributed to the previous tax year. However, like RRSPs, you aren’t required to claim the deduction right away. Instead, you can carryforward non-deducted contributions and claim them in a later year if you are expecting to be in a higher tax bracket in the future.
You are allowed to carry forward unused portions of your annual contribution limit but only up to a maximum of $8,000. For example, if you contributed $5,000 to a FHSA in 2023 you would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). So, unlike a RRSP and a TFSA, unused contribution room of prior years doesn’t carryforward except for a maximum amount of $8 000.
The FHSA can remain open for up to 15 years. So there needs to be some consideration as to when the FHSA should be opened to start saving. Starting too young may mean the account has to be closed before a home is purchased. However, any savings in the FHSA not used to buy a qualifying home can be transferred on a tax-free basis into an RRSP. It can also be withdrawn on a taxable basis. If transferred to a RRSP, it would not reduce the RRSP contribution room.
One of the more recent changes made to the draft legislation is that you can now use both the FHSA and the Home Buyer’s Plan (HBP). The HBP provides for a tax-free withdrawal from your RRSP, up to $35 000, but the amount must be repaid into the RRSP in equal annual instalments over 15 years. Otherwise, the unpaid instalment amount is included in your taxable income for that year. The goal is to provide some cashflow for first time home buyers and eventually replenish the RRSP to continue the non-taxed investment growth to save for retirement. With the FHSA, you can preserve your RRSP contribution room and contribute to the FHSA instead. Plus, unlike the HBP, the FHSA withdrawals don’t need to be repaid to avoid taxation, so that’s more tax advantageous.
Using both the HBP and the FHSA will provide a total of $75 000 of capital, plus the growth on the funds contributed to the FHSA.
It’s also possible to transfer money from the RRSP on a tax-free basis to the FHSA subject to the annual contribution limits. Since those RRSP contributions were deducted for tax savings when contributed, you won’t get a deduction on the transfer to the FHSA. The advantage is that the withdrawal will be tax free, but without the requirement to repay it as with the HBP. That’s good on cashflow, but not great for saving for retirement as the RRSP doesn’t get replenished and the RRSP contribution room isn’t reinstated for the amount transferred to the FHSA.
Bottom line, the FHSA provides some additional tax advantages and flexibility, but some tax planning relative to your specific case may be needed.
Self-employed Contractors – both payer and payee beware!
Whether a worker is considered self-employed, or an employee can be a grey area. However, the distinction is important. A self-employed person is in business for themselves and has a level of independence from the payer. They have a risk of profit or loss. These are only a few of the facts to be considered in determining employment or self-employment status. If a business engages a self-employed person to provide services and the CRA determines that the self-employed person is really an employee of the payer, then the self-employed person is denied certain business expenses they may have deducted on their personal tax return. This is because the employees are more limited in the types of expenses they can claim as a deduction in their personal tax return compared to self-employed persons. In addition, the payer will be liable for CPP and EI contributions that were not withheld from the payment for employment services. The payer will often protect themselves from this risk by requiring service providers to incorporate their business. Should the CRA conclude that the workers were, in fact, not independent contractors, the corporation cannot be considered an employee and the payer is protected from paying CPP and EI contributions on the payments.
Sometimes the service provider wants to incorporate to benefit from a special lower corporate tax rate on small business income. However, this can be detrimental if the CRA determines the service provider is just an “incorporated employee”, called a “personal services business” in tax jargon. The payer is protected from any negative tax consequences in this situation. It is the incorporated service provider who will bear the negative tax consequences such as a punitive corporate tax rate compared to typical small businesses, and the denial of almost all business expenses. As several years can be reassessed by CRA at one time, with interest charges, this can be very costly.
CRA is in the process of running an “educational campaign” on this issue by sending out letters from June to December 2022 to taxpayers in certain industries, requesting information about their payer/payee relationships. Participation is voluntary. If you receive one of these letters, you are not under audit. However, in the past CRA has conducted audit projects to review payer/payee relationships in certain industries and issued tax assessments as a result. So, this may be an indication that CRA is going to undertake an audit project in the future. Or, the information obtained from some self-employed persons who wish to be considered employees, may be used by CRA to reassess the payer for EI and CPP withholdings. CRA does evaluate the facts of each case given specific criteria. So, whether you are the payer or the payee, now is a good time to re-evaluate with your Padgett advisor if your current working relationships are properly categorized and documented.
New Trust Reporting Requirements
New trust reporting requirements that the government intended to apply last year, will now apply for tax years ending as of December 31, 2022. One of the more significant changes is that bare trusts will be subject to the new reporting requirements. Previously only trusts that had taxes payable, or disposed of an asset, were required to file a tax return. Now, even if a trust has no income or did not make any distributions to beneficiaries, it may be required to file a return. So, if you have a trust that previously was not required to file a return, you should consider whether you now have a filing requirement. There are penalties for filing late. There are exceptions to these rules, the most common being graduated rate estate returns, qualified disability trusts, or trusts that have been in existence for less than 3 months. Other significant changes are the new requirements to disclose the following information: • The names, address, date of birth, jurisdiction of residence, and taxpayer identification number (SIN, BN, foreign TIN) for each: o trustee o beneficiary o settlor o any person who can exert influence over trustee decisions While these new and revised rules have not been finalized into law yet, it is expected to be finalized before year end. Since it may take time to collect information for the additional disclosure requirements, you should consider these new changes well before the filing deadline of March 31, 2023.
Income splitting is a term used to describe a method of shifting income from a higher income earner to a lower income earner. In the case of spouses, it is possible to achieve income splitting using a “prescribed rate loan”. The loan needs to be properly documented in a loan agreement. The lower income spouse borrows the funds and invests them. For tax purposes, it is important that the loan carries interest at the prescribed rate. It is the prescribed rate at the time the loan is set up that will be “locked in” for the duration of the loan, regardless of future prescribed rate increases. The lower income spouse needs to pay the interest on the loan annually to the higher income spouse, no later than January 30th. If this deadline is missed, even once, the loan becomes “offside” and for tax purposes, all the investment income would be taxed in the hands of the higher income spouse. Therefore, it is important to keep proof that the interest payments were made. The prescribed interest rate increased from 1% to 2% on July 1st, 2022 and is set to increase to 3% on October 1st, 2022. This means that the beneft of income splitting using “prescribed rate loans” will be mitigated for loans established after September 30th, 2022. If you wish to take advantage of this tax planning, the loan and documentation must be set up by September 30th 2022.
Business Investment Losses
A loss on an investment in a company you own or made in another person’s small business can qualify for some advantageous tax rules to help ease the impact on your finances. Whether the investment was in shares or a loan to a small business it may qualify for a full deduction against your personal income. Typically, only half of an investment loss would be deducted and only against investment capital gains. The ability to deduct these business investment losses against any type of personal income can reduce income taxes for the year by a substantial amount. It’s important that the nature of the investment be properly analyzed to ensure it meets the criteria. Many small businesses will meet the criteria. Furthermore, if the loss exceeds your income for the year, it is possible to carryback the loss against income you earned in the three previous years or carry them forward to apply against future income.The Canada Revenue Agency will typically ask for some documents to support your claim. If this unfortunate situation has impacted you, consult with your Padgett advisor to make sure that you can at least minimize your income taxes. Your Padgett advisor can also help you determine if the loss can be claimed even though the investment still exists, but the likelihood of recovery is very low.
Should You Incorporate Your Business?
If you own a business, you may have wondered if you should incorporate. Historically the income tax system in Canada has benefited incorporated Canadian small businesses. Although the income and deduction calculations are almost identical to an unincorporated business, the major differences are in the corporate taxation structure and tax planning opportunities. When developing the tax plan for your business, you and your advisor should look for opportunities in the following areas: Income splitting with family members;Tax deferral to the future;Estate planning for you and your family;Utilization of the capital gains exemption; andPlanning your retirement, including disposing of your business.Since personal and corporate tax as well as family law issues can make this issue complex, please contact our office to discuss your situation.
To encourage small businesses to invest in better ventilation and air filtration to improve indoor air quality, the Federal government introduced a temporary Small Businesses Air Quality Improvement Tax Credit. This refundable tax credit would be available in respect of qualifying expenditures attributable to air quality improvements in qualifying locations incurred between September 1, 2021 and December 31, 2022.
Tax Credit Rate and Limits
The tax credit would be refundable and have a credit rate of 25 per cent of the qualifying expenditures. There is a maximum of $10,000 in qualifying expenditures per location and a maximum of $50,000 overall (total locations and for the entire program). The limits on qualifying expenditures would need to be shared among affiliated businesses.
Who is Eligible?
sole proprietors
Canadian-controlled private corporations (“CCPCs”) with taxable capital of less than $15 million in the taxation year immediately preceding the taxation year in which the qualifying expenditure is incurred. For this purpose, the taxable capital of associated corporations is also counted.
partnerships. The credit would be claimed by members of the partnership that are CCPCs or individuals (other than trusts) and would be based on their proportionate interest in the partnership.
Qualifying Expenditures Qualifying expenditures would include:
expenses directly attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation and air conditioning (HVAC) systems, as well as the purchase of devices designed to filter air using high efficiency particulate air (HEPA) filters, the primary purpose of which is to increase outdoor air intake or to improve air cleaning or air filtration.
expenses attributable to an HVAC system would only be considered qualifying expenditures if the system is:
designed to filter air at a rate in excess of a minimum efficiency reporting value (MERV) of 8; or
designed to filter air at a rate equal to MERV 8 and to achieve an outdoor air supply rate in excess of what is required for the space by relevant building codes. For a system that is upgraded or converted, prior to the improvement the system must have been designed to filter air at a rate equal to MERV 8.
Qualifying expenditures would exclude an expense:
made or incurred under the terms of an agreement entered into before September 1, 2021;
related to recurring or routine repair and maintenance;
for financing costs in respect of a qualifying expenditure;
that is paid to a party with which the eligible entity does not deal at arm’s length;
that is salary or wages paid to an employee of the eligible entity
An expense that may be considered a qualifying expenditure would be reduced by the amount of any government assistance received by the eligible entity in respect of that expense.
Qualifying Locations
Qualifying locations generally mean real or immovable property used in the course of ordinary commercial activities in Canada (including rental activities), excluding self-contained domestic establishments (i.e., a place of residence in which a person generally sleeps or eats).
Timing
The tax credit would be available in respect of qualifying expenditures incurred between September 1, 2021 and December 31, 2022.
The taxation year for which an eligible entity would claim the tax credit would depend on when the qualifying expenditure was incurred:
Qualifying expenditures incurred before January 1, 2022 would be claimed in the first taxation year that ends on or after January 1, 2022. For example, a sole proprietor or individual member of a partnership would be able to make a claim in their 2022 tax return. A CCPC could make the claim in its first taxation year that ends after January 1, 2022.
Qualifying expenditures incurred on or after January 1, 2022 would be claimed as normal in the taxation year in which the expenditure was incurred.
About Padgett
The team at Padgett is committed to being a trusted partner, allowing your business to prosper and grow. We’re an accounting firm with a national network of offices that will work closely with you in the areas of accounting, tax planning and preparation, payroll, compliance and business advisory services. Our name is backed by a proven track record of success that spans more than 50 years and is fueled by a national network of accountants and tax professionals. This article originally appeared on https://smallbizpros.ca/
The Canada Revenue Agency has been busy dishing out fines and jail time for people convicted of income tax evasion and and failing to file income tax returns. They actually publish some of the cases on their website since the information has been made public and doesn’t contain anything that is confidential. They want to make sure that the average person has confidence in the system since almost everyone files their taxes and pays up on time. They want people to know that at least some people that are cheating the system will be caught and punished. They believe that publicizing the cases will be a deterrent for anyone that might be thinking of avoiding their taxes. Here is what the CRA has to say about this subject on their website at http://www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng.html
“The vast majority of Canadians pay their taxes. In fairness to all those law-abiding citizens, the CRA conducts compliance programs to ensure the uniform application of the laws it administers.
The CRA seeks publicity on conviction in the case of tax evasion. It does this to maintain confidence in the integrity of the self-assessment system, and to increase compliance with the law through the deterrent effect of such publicity.
The CRA may also seek publicity at different stages of an investigation, for example when information relating to the laying of criminal charges becomes available to the public through court records, to warn Canadians of potential fraud schemes.
If you have information about a suspected violation of any tax law, please contact the CRA Informant Leads Program.
The Voluntary Disclosures Program (VDP) promotes compliance with Canada’s tax laws by encouraging taxpayers to come forward to correct inaccurate or incomplete information and/or to disclose information that has not previously been reported to the CRA. Taxpayers may avoid penalties or prosecution if they make a valid disclosure before they become aware of any compliance action being taken by the CRA against them. These taxpayers will have to pay the taxes owing, plus interest.
For more information about the Criminal Investigations Program, go to The CRA’s Criminal Investigations Program”
Although they can’t catch everyone, it is worth knowing that even if you have been cheating the system for a number of years, they can still catch up to you.
Why would anyone want to steal your identity? They can use your personal information such as your social insurance number to open new bank accounts, get new credit cards, buy trips, cars, or transfer bank balances from one of your accounts to the new account. By the time you realize that you have been victimized, your credit rating could have been impacted and it can take a long time to repair the damage. Although you should not be responsible for the fraudulent purchases made in your name, the process required to clear everything up will be lengthy and tedious.
The CRA website has some great tips on how to protect yourself from people that are trying to steal your identity.
Never provide personal information through the Internet or by email. The CRA does not ask you to provide personal information by email.
Be suspicious if you are ever asked to pay taxes or fees to the CRA on lottery or sweepstakes winnings. You do not have to pay taxes or fees on these types of winnings. These requests are scams.
Keep your access codes, user ID, passwords, and PINs secret.
Keep your address current with all government departments and agencies.
Choose your tax preparer carefully! Make sure you choose someone you trust and check their references. Always review your return, agree with the content before filing, and follow up to make sure you receive your notice of assessment, since it contains important financial and personal information that belongs to you.
Before supporting any charity, use the CRA website at www.cra.gc.ca/charities to find out if the charity is registered and get more information on the way it does business.
Be careful before you click on links in any email you receive. Some criminals may be using a technique known as phishing to steal your personal information when you click on the link.
Caller ID is a useful function. However, the information displayed can be altered by criminals. Never use only the displayed information to confirm the identity of the caller whether it be an individual, a company or a government entity.
Protect your social insurance number. Don’t use it as a piece of ID and never reveal it to anyone unless you are certain the person asking for it is legally entitled to that information. If an organization asks for your social insurance number, ask if it is legally required to collect it, and if not, offer other forms of ID.
Pay attention to your billing cycle and ask about any missing account statements or suspicious transactions.
Shred unwanted documents or store them in a secure place. Make sure that documents with your name and SIN are secure.
Immediately report lost or stolen credit or debit cards.
Carry only the ID you need.
Do not write down any passwords or carry them with you.
Ask a trusted neighbour to pick up your mail when you are away or ask that a hold be placed on delivery.
The federal government is replacing the family tax cut and universal child care benefit which was an opportunity for parents of kids under 18 to claim expenses for raising their children. The new plan is called the Canada child benefit and may save some money for most lower to middle income Canadian families.
Here is an article by Evelyn Jacks and Walter Harder that explains the changes in detail:
Here’s what to expect in the new credit calculations. First, your cheque will now depend on family income from your 2015 tax return. June cheques were based on 2014 income. For couples, both spouses must have filed their 2015 returns in order to qualify. If you filed late, you may not receive your July cheque unless your return(s) were assessed before early July.
Most low to middle income families will receive more benefits under the Canada Child Benefit program than under the old Child Tax Benefit and UCCB (Universal Child Care Benefit) programs. And, as an additional benefit, none of the new amounts will be taxable (like the UCCB was).
The base amount for children under 6 is $6,400 or $533 per month. For children between 6 and 17 the base amount is $5,400 or $450 per month. Families whose 2015 net income (exclusive of UCCB) was below $30,000 will receive the full amount. As family net income increases, the CCB decreases. The rate of decrease depends both on family net income and the number of children.
It’s important to note that the clawback of the new benefits increases marginal tax rates more significantly in some tax brackets; in others, the marginal tax rates have been reduced. For example, a family with net income over $26,021 in 2014 and three kids had a clawback rate of 33.3%. That’s higher than the rates under the new revised regime at that level..
For a more detailed determination of your cheque amount (including provincial and disability benefits) check outCRA’s calculator.
In the past, planning for retirement was a much more simple process which involved calculating how much income you would need to live comfortably until you died. These days, fewer and fewer people have pension plans where they work, and people are living longer, so people need to start planning much earlier for their retirement. This can involve real estate investments, RRSP’s, TFSA’s and many other products. According to Evelyn Jacks, people need to consider several factors in their pre retirement planning which are listed below:
A Longer Work Life:
That means more employment and self-employment earnings in retirement, which requires new ways of planning for RRSPs, TFSAs, CPP and OAS benefits.
Real Estate:
More wealth and/or more debt, especially for those with one or more residences.
Double Incomes:
The pension accumulations of two people can be subject to income splitting, an opportunity not available in previous generations.
Tax-free Accumulations:
Home equity, TFSAs, insurance for life and health all bring new wealth planning opportunities.
Retirement Readiness:
The Boomer male or female may be ready to retire, but the financial needs of others in the family may prohibit them from doing so (for example, they may still have to help put their kids through university, assist with the care and support of elderly relatives, or XXX). This may ring even truer for the Millennial generation, many of whom have pushed their childbearing years into their thirties.
More Minis:
Grandparents may have younger grandchildren than in previous generations, as Millennials have their children later; these new families may require continued support from grandparents, especially for housing and for education planning for children.
Inheritances:
There will be a significant transfer of wealth both to the Boomers and from the Boomers to the next generation. These pools of capital need to be invested responsibly at a time when financial literacy is significantly lacking and trust tax rules are changing.
Potential Conflict:
Family complexities—including blended families and family members that are spread afar in a mobile, global economy—make planning with multiple stakeholders difficult.
Higher Taxation:
The high tax rates that Boomers and their families face are unprecedented, on both income and capital, particularly in the absence of income averaging and income splitting.
Make sure you consult with your accountant when you are starting your pre retirement planning.
