Know the Tax Rules 

Keeping up to date with amendments to the Canadian Income Tax Act and its accompanying regulations can be a daunting task even for tax lawyers and accountants.   

Nevertheless, it is always worthwhile to make the effort to understand as much as possible of our ever-evolving tax laws. Here are a few items you should be aware of. 

Increased Tax Instalments  

If the amount of taxes owed in 2008 based on the 2007 taxation year exceeded $2,000, the taxpayer was required to pay in quarterly federal instalments. For 2009, the threshold has been increased to $3,000. If the taxes owed this year based on 2008 taxable income exceed $3,000, the taxpayer will be required to make quarterly instalments. Failure to make adequate instalment payments will result in interest charges when filing tax returns for 2009. 

Log Those Kilometres 

The CRA in conjunction with the Office of the Secretary of State (Small Business and Tourism) is trying to simplify the record-keeping now required for motor vehicle expense claims and a revised administrative policy is expected for tax year 2009. At present, self-employed as well as salaried and commission employees who use a vehicle for business purposes must keep a log for each vehicle used. The log must record the total kilometres driven plus a record of each individual business trip, its date, destination, purpose and number of kilometres driven. Part of the record must be the odometer readings at the beginning and end of the fiscal year. 

Under the new proposals, it is expected the CRA will require a logbook for a sample period only. A record showing the details of a period considered by the employer as representative of how the vehicle was used during the year will be considered sufficient to support a motor vehicle expense claim. This will certainly be helpful for those who make scheduled rounds of clients. Naturally, prudence would suggest the taxpayer choose a truly representative period rather than one that, because of the business cycle or other factors, demands excess travel distances. It would also be wise, as a minimum, to maintain a record of the monthly opening and closing odometer readings as support for the representative detail in the event of an audit by CRA. Check with your accountant about this matter before filing your 2009 taxes. 

Some But Not All 

The deterioration of retirement investment income has changed retirement plans for most of the over-65 group. Many will determine they wish to continue in their existing occupations or find renewed employment. Those who are over 65 are entitled to receive Old Age Security to a maximum approximating $6,100. Taxpayers should be aware that once total income (line 150 on personal tax returns) exceeds $64,718, CRA will reduce the amount of OAS entitlement. This "clawback" is designed to provide assistance on a "needs" basis and reduces the amount of OAS entitlement to zero when total income reaches $105,266. For tax planning purposes, a review of the items aggregating total income should determine whether specific income sources may be reduced to maintain an amount under $64,618.

If as a result of employment conditions you are (or will be) entitled to Employment Insurance benefits and earn in excess of $51,375, some employment benefits will have to be repaid. EI amounts may have to be totally repaid depending upon the amount received. Naturally, this will have an impact on the anticipated refund or taxes payable.  

Retirement 

Although there have been no changes to the tax consequences provided for "retiring allowances" (a term that includes severance pay), individuals who are receiving such allowances should determine whether the allowances are eligible to be transferred to an RRSP or RPP.  

It is extremely important from a tax viewpoint to ensure that existing retirement vehicles within your company are transferred directly to another RRSP. Should you as an individual redeem the funds, the amount received will be added to your income. Just as a point of interest, retiring allowances cannot be transferred to a spousal RRSP.  

Long-term employees may receive severance payments if they worked prior to 1995. For the period from 1989 to 1995, those employees are able to make additional contributions to RRSPs following the same procedures allowed for retiring allowances. The amount per year or part year is capped at $2,000 per annum; for those employed prior to 1989 the cap is increased by $1,500, unless the employer vested the contributions. 

Tax-free Savings Accounts 

As an alternative to the RRSP, wherein a tax advantage is received at the time of contribution, the TFSA allows the individual to accumulate $5,000 each year a tax return is filed. The contribution to a TFSA is not tax deductible, but all increases to the fund, whether capital or income, accrue without tax consequences. Furthermore, funds removed from the plan are not taxed. TFSAs can be used as collateral on loans advanced by financial institutions whereas RRSPs can not. 

When a taxpayer dies, the TFSA is considered ended. The amount accumulated to the date of death, including unrealized capital appreciation, is tax-free. Any amount earned in the TFSA after death is taxable, unless the account is transferred to a surviving spouse or common-law partner. Such transfers do not reduce the contribution limit of the transferee.

It should be noted that, commencing in 2009, fees for services under the TFSA are not deductible and losses incurred on the transfer of securities to the plan are not recognized for tax purposes. 

Other provisions within the legislation should be reviewed with your advisor to ensure a complete understanding of the financial impact of investing, divesting, or dying while holding a TFSA. 

On the Road Again 

Long-haul road warriors will see the deductibility of meals rise by 5% of the total expenditure to 65% for 2008. 

Give Me a Home 

If neither you nor your spouse or common-law partner has resided in a home owned by you or your spouse or common-law partner during the four calendar years prior to the year of withdrawal and up to 30 days prior to withdrawal, you are eligible to borrow funds from your RRSP without being taxed on withdrawal. The borrowing limit has been raised from $20,000 to $25,000 after January 27, 2009. Each spouse or common-law partner can borrow $25,000 from their own RRSP. 

For those who own a home and have contracted for renovations, the new Home Renovation Tax (HRT) credit will apply for work performed after January 27, 2009. A 15% federal tax credit is available if the contracted work falls between $1,000 and $10,000. The goods must be purchased and the work completed between January 27, 2009 and February 1, 2010 for the federal tax credit of $1,350 (15% of $9,000) to be accepted. There are a number of areas, however, in which the tax credit will not apply. It is advisable to review the CRA website to determine the conditions that may affect you.

Understanding tax issues requires a specific interpretation of the tax laws. Often the layperson's understanding of tax issues, based on their own interpretation of the wording, may be subjective. It is always beneficial to seek the guidance of your chartered accountant to maximize the benefits available from interpreting income tax laws and regulations to avoid the costly process of a reassessment.

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