Tax Tips & Traps

The Canada dental benefit, announced in September 2022, provides up-front tax-free payments to cover dental expenses for children under age 12 without dental coverage. The program began December 1, 2022, with expenses retroactive to October 1, 2022 being covered.

The program is available for two periods: December 1, 2022 to June 30, 2023, and July 1, 2023 to June 30, 2024. While the program expires in mid-2024, the government has stated that it is committed to fully implementing a dental program for all households with income under $90,000 by 2025.

Services that dentists, denturists or dental hygienists are lawfully able to provide, including oral surgery and diagnostic, preventative, endodontic, periodontal, prosthodontic and orthodontic services, are eligible for the benefit.

Amounts

The amount of payments that are provided annually (per period) per child under age 12 are based on adjusted family net income (AFNI) as follows:

• $650/child if AFNI is under $70,000;
• $390/child if AFNI is between $70,000 and $79,999; and
• $260/child if AFNI is between $80,000 and $89,999.

AFNI for the benefit’s purpose is the same as for the Canada child benefit, with the annual income period ending on December 31, 2021 for the first period and December 31, 2022 for the second period.

Shared-custody parents at the beginning of the relevant period are each eligible for 50% of the benefit, based on whether they incur or will incur eligible expenses in the period and their respective AFNI.

The benefit does not reduce other federal income-tested benefits (for example, the Canada workers benefit, the Canada child benefit, and the GST credit).

Eligibility

To qualify, parents need to attest that the following conditions are met:

• their child does not have access to private dental care coverage (for example, through a parent’s employer or coverage that is paid for personally); and
• the child has received, or is intended to receive, dental care services during the relevant period.

Parents also need to provide documentation to verify that out-of-pocket expenses occurred (e.g. show receipts) if required by CRA.

To qualify, the child must be under 12 on December 1, 2022 for the first period and under 12 on July 1, 2023 for the second period.

Application

The application portal for the benefit is available online through CRA’s My Account. Those unable to apply online can call 1-800-715-8836 to complete their application with an agent. In addition to an individual’s standard identifying information and the above-noted attestation, parents need to provide CRA with the name, address and telephone number of their and their spouse or common-law partner’s employer. They also need to provide information about the dental service provider from which they received or intend to receive services for their child.

ACTION: Eligible individuals must apply for this benefit on their own as accountants and representatives cannot apply on the client’s behalf.

A June 17, 2022 Ontario Superior Court of Justice case considered whether a will had been appropriately witnessed. In 2020, the owner of an insurance agency was diagnosed with terminal cancer and drafted a final will and testament. As it was the height of the COVID-19 pandemic, she chose two of her employees to meet her outside of the agency to sign the document as witnesses. She left everything to two children and nothing to the third. She died later that year.

Subsequent to her death, one of the beneficiaries wound up the agency and provided severance to the employees. One of the employee witnesses was not happy with the 14 weeks of severance pay offered and refused to affirm that she had witnessed the will signing until the dispute over her severance was completed. The Court also noted that she was quickly rehired by another insurance agent, the deceased’s child who had not received anything from the will. Later, the witness argued that she was not physically close enough to confirm that she had actually witnessed the document being signed.

The circumstances indicated that the witness was present at the signing, was close enough to see what was happening, and as a clerk in an insurance agency, would not have originally signed the will inappropriately. The Court found that the witness was lying about not having witnessed the signing with the likely motivation of increasing her severance.

While the will was eventually determined to be valid, this case reiterates the importance of carefully selecting individuals to witness signing important documents, such as a will.

ACTION: When selecting an individual to witness the signing of a legal document, consider whether they would be available and willing to properly verify their signature in the future, if required.

CRA updated several administrative policies in respect of employment benefits, effective January 1, 2022. Two of the key changes relate to employee gifts and parking. These updates were released in late 2022.

Gifts, awards and long-service awards

Under CRA’s existing gifts and awards administrative policy, the first $500 of annual gifts and awards provided to arm’s length employees is non-taxable. This policy does not apply to cash or near-cash gifts. Historically, CRA had considered all gift cards to be cash or near-cash gifts and, therefore, a taxable benefit.

However, CRA will now accept certain gift cards to be non-cash and eligible to be a non-taxable benefit provided all of the following requirements are met:

• the gift card comes with money already on it which the terms clearly state cannot be converted to cash;
• the use of the gift card is limited to purchases from a single retailer or a group of retailers identified on the card;
• the employer maintains a log to record all of the following details:
  • name of the employee;
  • date the gift card was provided;
  • reason for providing the gift card to the employee (e.g. gift, award, social event);
  • type and amount of gift card; and
  • name of retailer(s) at which the gift card can be used.

Parking

Generally, employer provided parking is a taxable benefit to employees unless a particular exception applies, such as where there is scramble parking. As a COVID-19 relieving measure, CRA stated that where there was a closure of the place of employment (including situations where employees were given the option to work from home full-time) due to COVID-19 between March 15, 2020 and December 31, 2022, no taxable benefit arose in respect of employer-provided parking in this period. When the employee returns to their regular place of employment to perform their duties, including returning on a part-time basis, the policy no longer applies, meaning that the parking benefit becomes taxable (unless another exception applies).

CRA also discussed many other policies related to parking benefits, such as the exception for scramble parking such that no taxable benefit arises. This policy requires that parking spaces are not assigned and are available to all employees who want to park. Not more than two parking spaces can be available for every three employees who want to park. CRA indicated that this ratio would be based on the average number of parking spaces and employees, calculated at least annually, with a recalculation if there is a significant change.

ACTION: Consider whether these updates will affect the taxability of current benefits offered.

A September 12, 2022 Tax Court of Canada case reviewed the gain on a residential property purchased in 2007 and disposed of in 2011. The property was substantially rebuilt during the ownership period. The proceeds, cost and gain were all determined by CRA as the sale was unreported. These amounts were largely unchallenged by the taxpayer and accepted by the Court. The Court noted that the taxpayer’s tumultuous relations with her ex-husband, whom she divorced in 2014, resulted in “an off-again/on-again cohabitation” during much of the relevant period.

Although the taxpayer argued that the property was her principal residence, CRA denied it, assessing the gain as an adventure in the nature of trade and, therefore, fully taxable. CRA also assessed outside the normal reassessment period of three years and applied gross negligence penalties.

Capital property or adventure in the nature of trade?

The Court accepted that the taxpayer lived at this property from time to time during the ownership period, a personal use inconsistent with a business venture of acquiring, improving and selling the property for a profit. In addition, the taxpayer was a teacher not connected to the real estate sector. Her marital difficulties demonstrated a plausible reason for acquiring this larger residence for personal use as a residence in which to start a family. There was no suggestion that the reconstruction was undertaken for purposes other than for personal use. The nature of the property, length of ownership, lack of prior or subsequent activity in real estate and her personal circumstances all led to the conclusion that the property was acquired for personal use and not resale, so it was a capital property.

Principal residence?

The property was used as an intermittent refuge and was never occupied with regularity. In the absence of evidence such as a change of address, domestic expenses beyond mandatory utilities or other permanent hallmarks, the Court could not conclude that the property was ordinarily inhabited, preventing it from being the taxpayer’s principal residence. As such, the taxpayer could not claim the principal residence exemption on the disposition.

Statute-barred?

The Court acknowledged that a fully exempt principal residence sale was not required to be disclosed in the taxpayer’s 2011 personal tax return. However, the taxpayer provided no details to show a reasonable basis for believing the gains were fully exempt. Without such evidence, she could not support her defense that the failure to report the gain was based on a reasoned and thoughtful assessment of her filing position rather than a result of carelessness or neglect, as CRA asserted. As she could not disprove CRA’s assertions, the return could be assessed outside the normal reassessment period.

Note that all principal residence sales were required to be disclosed in an individual’s tax return starting in 2016. If not reported, the individual could not claim the principal residence exemption on the disposition of the property and would be liable for the tax on the gain on disposition. As the taxpayer’s disposition was in 2011, this issue was not addressed in the Court case.

Gross negligence?

The Court noted that CRA’s gross negligence penalty assessment (50% of the understated tax) was linked to three factors: the conclusion that the property was held in the course of an adventure in the nature of trade; the assertion that the taxpayer never lived in the property; and the magnitude of unreported income. All three of these assertions were incorrect. The taxpayer’s belief that she could navigate the tax laws related to personally held real property was incorrect; however, it was not tantamount to a deliberate act demonstrating indifference to compliance with the law. The gross negligence penalties were therefore reversed.

ACTION: Ensure to report all dispositions of real property, whether it is eligible for the principal residence exemption or not, on your personal tax return.

On December 6, 2022, the Auditor General of Canada released its report on COVID benefit compliance enforcement. The report reviewed a total of $210.7 billion in payments with the following breakdown among programs.

• Canada Worker Lockdown Benefit(CWLB) – $0.9 billion
• Canada Emergency Wage Subsidy(CEWS) – $100.7 billion
• Canada Recovery Sickness Benefit(CRSB) – $1.5 billion
• Canada Recovery Childcare Benefit(CRCB) – $4.4 billion
• Canada Recovery Benefit(CRB) – $28.4 billion
• Canada Emergency Response Benefit(CERB) and related EI program – $74.8 billion

The report indicated that $4.6 billion in overpayments were made to ineligible individuals, and an additional $27.4 billion of payments to individuals and businesses should be investigated further. This included an estimated $15.5 billion in CEWS received by employers that did not suffer a significant drop in revenue, extrapolated from a review of monthly GST/HST filers’ reported revenues. The report noted that GST/HST filings were far from a perfect measure but were still useful for risk assessment.

CRA has indicated that they have completed audits of $2.8 billion in CEWS claims (1,739 applications), but this only led to $200 million being redetermined post-payment. $11.6 million in penalties had been issued as of October 28, 2022.

The report also indicated the following in respect of CERB paid to recipients likely ineligible:

• $1.6 billion was provided to 190,254 individuals who had quit their jobs;
• $6.1 million was provided to 1,522 people who were in prison and $1.2 million to 391 dead people; and
• $2.2 million was provided to 434 children under 15 years old at the time of application.

Just before the release of the report, a November 30, 2022 National Post article (CRA clawing back $3.2 billion from suspect COVID-19 aid payments, but that’s just the start, Christopher Nardi) noted the following, based on comments from two top CRA officials:

• CRA has issued notices of redetermination disallowing $3.2 billion in COVID-19 benefit overpayments;
• CRA sent out 825,000 notices of redetermination to individuals it suspected of receiving ineligible or excess payments from several COVID-19 benefit programs as of November 18, 2022;
• post-payment reviews are set to continue until at least 2025; and
• 25,000 cases of fraudulent payments were tied to identity theft.

Many of the overpayments stemmed from confusion and challenges associated with the attestation-based programs.

One of the CRA representatives also noted that “we want to recover money, but we don’t want to create financial hardship” and “it’s going to be based on the capacity of each and every individual to repay.”

ACTION: Review and audit activity in respect of COVID benefits is likely to increase. Ensure to have all supporting documentation ready for claims made.

Download your 2022 Personal Income Tax Return Checklist here!

December 31, 2022 is fast approaching… click here to download a list of tax planning considerations. Please contact us for further details or to discuss whether these may apply to your tax situation.

Where tips are “paid” by an employer, they are pensionable and insurable. In such cases, the employer must also withhold income tax and report the amounts on the employee’s T4.

CRA’s current administrative policy is that if the tip is controlled by the employer (controlled tips) and then transferred to the employee, it is considered to be paid by the employer. In contrast, direct tips are considered to have been paid directly by the customer to the employee. Therefore, the tips are neither insurable nor pensionable, income tax deductions are not required to be withheld and amounts are not required to be reported on the T4.

Controlled tips are generally those where the employer has influence over the collection or distribution formula. CRA has provided several examples of controlled tips, including the following:

• the employer adds a mandatory service charge to a customer’s bill to cover tips;
• tips are allocated to employees using a tip-sharing formula determined by the employer; and
• cash tips are deposited into the employer’s bank account and become, or are even commingled with, the property of the employer, and then are paid out to the employees.

Direct tips are paid directly to the employee by the customer, where the employer has no control over the tip amount or its distribution. CRA has also provided several examples of direct tips, including the following:

• a customer leaves money on the table at the end of the meal and the server keeps the whole amount;
• the employees and not the employer decide how the tips are pooled or shared among employees;
• a customer includes an amount for a tip when paying the bill by credit or debit card, and the employer returns the tip amount in cash to the employee at the end of the shift. In exceptional situations, the cash tips could be paid out the day after, for example, if there was not enough available cash on hand; and
• the restaurant owner informs the server that if a customer pays by credit or debit card and includes a voluntary tip, the restaurant will return the full tip amount to the server in cash at the end of each shift.

An August 31, 2022 Federal Court of Appeal case reviewed whether the electronic tips left by restaurant customers (e.g. paid by credit or debit cards) that were distributed by the restaurant to the servers were considered “paid” and therefore pensionable and insurable. Only a portion of the electronic tip was distributed to the servers, based upon the particular tipping arrangement at the restaurant (some funds were retained for items such as credit card fees and tip-outs to the kitchen staff). Amounts were transferred to the servers the day after the particular shift was worked. The Tax Court of Canada (TCC) previously held that the amounts transferred to servers were paid by the employer, and therefore, pensionable and insurable.

Taxpayer loses
The FCA found that the TCC did not err in its finding. In particular, the TCC noted that the electronic tips had not previously been in the server’s possession. Instead, the customers had provided the electronic tips to the employer as part of a single transaction to settle the dining bill. The TCC followed a 1986 Supreme Court of Canada case that found that the word paid could be interpreted broadly to mean the mere distribution of an amount by the employer to the employee.The FCA also stated that factors such as the following are not determinative and might be of little to no relevance when determining whether an amount is paid by an employer:

• when the amount is paid;
• whether the server is paid all or some of their own tips or pooled tips;
• whether the employer keeps a portion of the tips; and
• whether the tips are distributed under a collective agreement, a written contract, an oral agreement or otherwise.

The case did not deal with any cash tips the servers may have received or tip-outs received by kitchen staff, on-site management or support staff. Likewise, the FCA was not concerned with the total electronic tips left for the servers, but only the net amount paid out the next day.

It remains to be seen whether CRA’s administrative policy will be changed to reflect the courts’ rulings. As of October 10, 2022, the CRA website did not have information showing an integration of the courts’ rulings into their administrative policy.

Action: Restaurant operators should be vigilant for developments on this issue and be prepared to adjust tipping policies, and/or reporting and withholding policies if necessary.

A July 28, 2022 Tax Court of Canada case considered whether input tax credits (ITCs) in respect of a farming operation’s expenditures were available. The farming activity consisted of breeding and racing various horses and involved at least four full-time employees at one point. Over a nine-year period (2007-2015), the operations never experienced positive net earnings and more than $4 million in losses were accumulated. The owner partially financed operations with earnings from his law practice.

In order for ITCs to be available, supplies must have been made in the course of a commercial activity. For a commercial activity to have occurred, there must have been a reasonable expectation of profit.

The Court considered the following criteria when determining whether the taxpayer carried on a commercial activity:

• profit and loss experience;
• the taxpayer’s training;
• the taxpayer’s intended course of action; and
• the capability to show a profit.

Taxpayer loses
While the Court noted that the taxpayer was clearly passionate and knowledgeable about horses and had invested significant funds and time, it was insufficient to demonstrate that there was a reasonable expectation of profit. Ultimately, the Court found that the taxpayer’s lack of financial organization (he did not have financial statements) and lack of financial tools left him without the ability to diagnose the causes of his farm losses. Without the ability to understand the losses, he did not have the ability to truly stem them, and therefore he did not have a reasonable expectation of profit. The ITCs were denied.

Action: Ensure to sufficiently compile financial records and information such that you can reasonably identify the profitability problems in your operation.

Directors can be personally liable for payroll source deductions (CPP, EI and income tax withholdings) and GST/HST unless they exercise due diligence to prevent the corporation from failing to remit these amounts on a timely basis.

An August 31, 2022 Tax Court of Canada case found that the director was not duly diligent and therefore was personally liable for the corporation’s unremitted payroll deductions, interest and penalties of $78,121 from January 2011 to April 2012.

The taxpayer argued that he was duly diligent as he asked at the directors’ meeting each month whether the tax remittances were up-to-date and received oral confirmations that they were. The taxpayer stated that he had “checked the box” at each directors’ meeting. He also argued that his decisions were driven by materiality; he focused his efforts on the corporation’s overall well-being and safeguarding the millions of dollars of investment, rather than the payroll remittances that he considered “tiny.”

Taxpayer loses

The Court ruled that the taxpayer was not duly diligent in preventing the failure to make adequate payments. It noted that the taxpayer never contacted CRA to confirm whether payroll remittances were current, which was particularly problematic as he was unable to obtain reliable financial statements and was aware of the difficult financial situation. While it was the taxpayer’s view that this was someone else’s job, there was no evidence of the taxpayer ever asking anyone else to follow up with CRA.

Action: Prior to accepting any role as a director, ensure to fully understand your responsibilities and potential exposure to personal liability. If currently acting as a director, make sure to be dully diligent in ensuring payroll and GST/HST payments are properly made.

Individuals may be asked to take on various roles in respect of loved ones, friends, clients or others. One role that is particularly riddled with challenges is that of an estate executor. While an individual may carry out their duties in an appropriate manner, it is important to consider the risks of unhappy beneficiaries and any other undesirable outcomes, including litigation and/or strained relationships.

A March 4, 2022 Tax Court of Canada case reviewed whether the taxpayer was personally liable for the estate’s tax debts. On the death of the taxpayer’s father in 1994, the taxpayer and his brother became executors of the estate. The taxpayer argued that he renounced his role of executor two months after the death of his father and therefore should not be held liable for the estate’s tax debts.

The father left most of his estate to the taxpayer’s brother, as well as a portion to grandchildren and great-grandchildren. The taxpayer accepted this decision but wanted to ensure that his daughter received her share of the estate. To this effect, in 2010, the taxpayer and his brother took steps to distribute a balance of $240,000 payable to the taxpayer’s daughter, secured by a mortgage against one of the estate’s properties. That is, the taxpayer’s daughter was essentially provided a $240,000 receivable from the estate. No clearance certificate was obtained, and the estate was in arrears with its taxes. In 2016, the brother died.

While the taxpayer argued that he renounced his role as executor and provided an alleged handwritten note from 1994 to that effect, the Court did not accept that he formally renounced his role. While the Court acknowledged that the taxpayer may not have understood everything about being an executor or every aspect of a land transfer, the Court believed he understood that he was signing as an executor. As he was the executor when the mortgage was secured and did not obtain a clearance certificate, he was held personally liable for the estate’s tax debts.

The Court further stated that even if it did find that the taxpayer had properly renounced his role, the taxpayer acted as a “trustee de son tort” (a person who is not appointed as a trustee but whose course of conduct suggests that he be treated as one), and for income tax purposes, he would have been considered a “legal representative.”

Action: Acting as an executor comes with significant responsibilities. Failure to properly administer the estate can result in personal liability. If you choose to decline the role, you must do so properly and not as an executor.

Legislation has been proposed for trusts (including estates) with years ending on December 31, 2022 and onwards that would significantly expand the reporting rules. More trusts would be required to file tax returns, and more information would be required to be disclosed in these returns. In addition, sizable penalties would be introduced for non-compliance.

More trusts and estates required to file

Under the existing rules, trusts are exempt from filing a T3 tax return if they have no taxes payable and no dispositions of capital property. However, under the proposals, tax returns will be required for all Canadian resident express trusts (this generally means trusts created deliberately) that do not meet at least one of a number of exceptions. Some of the more common exceptions include the following:

• trusts in existence for less than three months at the end of the year;
• trusts holding only assets within a prescribed listing (including items such as cash and publicly listed shares) with a total fair market value that does not exceed $50,000 at any time in the year;
• trusts required by law or under rules of professional conduct to hold funds related to the activity regulated thereunder, excluding any trust that is maintained as a separate trust for a particular client (this would apply to a lawyer’s general trust account, but not specific client accounts); and
• registered charities and non-profit clubs, societies or associations.

Reporting will be required where a trust acts as an agent for its beneficiaries (referred to as bare trusts in the government’s explanatory notes). No details on the intended breadth of such trusts have been provided by the Department of Finance or CRA to date.

More disclosure of parties to trusts

Where a trust is required to file a tax return, the identity, including residency, of all of the following people must be disclosed:

• trustees, beneficiaries and settlors; and
• anyone that has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the income or capital of the trust.

The requirement to provide information in respect of the beneficiaries would be met if beneficiary information is provided for all whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return. Where there are beneficiaries whose identity is not known or ascertainable with reasonable effort, the person making the return would be required to provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust. For example, where the beneficiaries are both the current and future grandchildren of the settlor, details in respect of the current children must be provided in addition to details of the trust terms describing the future class of beneficiaries.

The new rules would not require the disclosure of information subject to solicitor-client privilege.

Substantial penalties

Failure to make the required filings and disclosures on time attract penalties of $25 per day, to a maximum of $2,500, as well as further penalties on any unpaid taxes. New gross negligence penalties have been proposed, applicable to filings not made on time and inaccurate filings. These penalties are proposed to be the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime, leading to the concern that multiple persons could be subject to these substantial penalties for a single trust.

Action: Make a list of all arrangements that you and your family have that may be considered a trust or bare trust. Review them with a professional to determine whether they would be subject to the rules. Obtain relevant information that will be required for the filing of the particular trust returns.

A June 2, 2022 Technical Interpretation discussed the taxability of funds received through crowdfunding campaigns. CRA first noted that amounts received through a crowdfunding arrangement could represent loans, capital contributions, gifts, income or a combination of two or more of these. This means that the funds received could be taxable (such as business income) or not (such as a windfall, gift or voluntary payment). As the terms and conditions for each campaign vary greatly, the determination of tax status must be conducted on a case-by-case basis.

Where an amount is not a windfall, gift or other voluntary payment, the amount may be taxable if it constitutes income from a source. To be a non-taxable gift or other voluntary payment, the following conditions must be met:

• there is a voluntary transfer of property;
• the donor freely disposes of their property to the donee; and
• the donee confers no right, privilege, material benefit or advantage on the donor or on a person designated by the donor.

CRA opined that contributions would likely be considered non-taxable gifts in the case of a “Go Fund Me” campaign created by family members of an individual with cancer to assist in that individual’s treatment.

In an August 23, 2019 Technical Interpretation, CRA considered whether an employer’s contribution to their employee’s crowdfunding campaign to assist with the cost of additional therapies and support for the employee’s recently born child would be received in the recipient’s capacity as an employee (taxable) or individual (not taxable).

CRA indicated that, where the person is dealing at arm’s length with the employer and is not a person of influence (such as an executive who controls employer decisions), the benefit or amount would generally be received in the person’s capacity as an individual (non-taxable) where the amount is:

• provided for humanitarian or philanthropic reasons;
• provided voluntarily;
• not based on employment factors such as performance, position or years of service; and
• not provided in exchange for employment services.

If considered non-taxable, CRA opined that, as the contribution was not an expense incurred to gain or produce income, it would not be deductible

ACTION: Amounts raised by crowdfunding campaigns may be taxable or non-taxable, depending on the circumstances. Ensure to provide details on these activities so that the amounts are properly reported.

The 2022 Federal Budget included several proposals that would significantly change the taxation environment when buying and selling a home. Broadly, the government proposed various incentives for first-time buyers and extended family units in addition to bright-line tests/restrictions for those purchasing homes for profit (e.g. home flippers). Taxpayers should consider how the changes will affect their intended purchases and sales. In some cases, it may be beneficial to expedite a purchase or sale, while in others, it may be prudent to delay.

New possibilities and enhanced programs include the following:

• Home accessibility tax credit – The annual expense limit would be doubled to $20,000 such that the maximum non-refundable tax credit would be $3,000, proposed to be effective for 2022 and subsequent taxation years. This credit applies to enduring and integral home renovations in respect of a taxpayer, or a relative who is (or will be) living with the taxpayer, that is either a senior or eligible for the disability tax credit. The renovation must enable the individual to gain access to the home, be more mobile or functional in the home, or reduce the risk of harm within, or in gaining access to, the home.
• Home buyers’ tax credit – The amount would be doubled such that eligible first-time home buyers could access tax relief of $1,500, proposed to be effective for acquisitions of a qualifying home on or after January 1, 2022.
• Tax-free first home savings account – A new registered account would allow for tax-deductible contributions of up to $8,000 annually and up to $40,000 in total; withdrawals from the plan (including income earned in the plan) to purchase a first home would not be taxable. This initiative is expected to become available in 2023.
• Multigenerational home renovation tax credit – A new tax credit would provide relief on up to $50,000 of eligible expenses to construct a secondary suite for a senior or person with a disability to live with a relative. This initiative is expected to become available in 2023.

New cautions and restrictions include the following:

• Residential property flipping rule– A new rule would be introduced to deem all gains arising from the disposition of a residential property (including rental property) that was owned for less than 12 months to be business income, other than any disposition for which an exception would apply (such as where a death or addition to the family necessitates a move). Sales on homes owned for 12 months or more would follow the traditional rules. This means that such sales could still be classified as fully taxable business income and not be eligible for the principal residence exemption. This measure would apply to residential properties sold on or after January 1, 2023.
• Foreign buyer property ban – Foreign commercial enterprises and people who are not Canadian citizens or permanent residents would be prohibited from acquiring non-recreational residential property in Canada for two years. This would not apply to refugees and people authorized to come to Canada while fleeing international crises, certain international students on the path to permanent residency or individuals on work permits residing in Canada.
• GST/HST on assignment sales by individuals – All assignment sales in respect of newly constructed or substantially renovated residential housing would be taxable for GST/HST

In addition to the above tax measures, Budget 2022 proposed to develop and implement a Home Buyers’ Bill of Rights and national plan to end blind bidding. This Bill of Rights could also include items such as ensuring a legal right to a home inspection and ensuring transparency on the history of sales prices on title searches.

ACTION: Consider the expected timing of implementation for each of these measures and the impacts on purchases or sales.

Individuals who normally receive OAS are occasionally surprised when some OAS is subject to a special tax (commonly referred to as a “clawback”) with their T1 tax filings due to high earnings. In particular, OAS is clawed back at a rate of 15% of adjusted income (AI) received in that year over an indexed threshold amount.

The current and upcoming threshold amounts are $79,845 (2021) and $81,761 (2022). If receiving maximum OAS in 2021 (assuming no changes for items like deferred application, being over age 75, etc.), the full amount will be clawed back if 2021 AI is $129,757 or higher.

AI is net income before the deduction of any clawback with a few modifications, such as removal of Registered Disability Savings Plan (RDSP) income inclusions.

OAS payments starting in July are subject to withholdings based on AI of the prior calendar year. If it is known that AI for the current year will be less than that of the prior year, Form T1213(OAS) can be filed to request reduced withholdings.

Some planning considerations

Defer commencement of OAS receipt

Future OAS payment increases of .6% per month of delay (to a maximum of 36% for 5 years of deferral) are provided to compensate for the deferral of OAS pension payments. This flexibility may permit a person to reduce or eliminate the OAS clawback by deferring the receipt of OAS until the income of the person is below the AI clawback threshold. If OAS will be clawed back in its entirety, it costs noting to delay but provides the benefit of increased future payments. Increased OAS payments also increase the AI level at which all OAS is clawed back.

A further possibility for a high-income individual is to retroactively apply early in a year after reaching age 65 to receive up to additional 11 months of benefits in a single calendar year, hopefully retaining some benefits in that one year. For high-income seniors, application could be delayed resulting in the full 36% enhancement and 23 payments received in the year the individual reaches age 72.

Use resources that reduce AI

It is important to know how certain sources of income affect AI as any changes between the beginning clawback threshold and the amount at which OAS is completely eroded carry a 15% impact on OAS entitlement. Note that 115% of ineligible dividends and 138% of eligible dividends are included in AI. On the other hand, only 50% of capital gains are included.

Watch out for deductions

Certain deductions such as non-capital and net capital losses, the capital gains deduction, and the northern residence deduction will not reduce clawback. As such, for example, while no tax may need to be paid on the sale of qualified small business shares or qualified farm property, OAS could still be significantly impacted. On the other hand, deductions for pension splitting, which are discretionary, do reduce AI.

From an overall perspective, it may even be beneficial to shift pension income to the higher-earning spouse if it reduces clawback for the lower earner, despite the increase in marginal tax rates.

Time income inclusions

If an individual’s AI will unavoidably already fully eliminate OAS, consider whether additional amounts that have high impacts on AI could be taken into incomein the current year, with the after-tax amounts to be used to fund needs in future years. Likewise, if far below the prescribed threshold, the same may be considered as additional amounts do not erode OAS until that threshold is reached. Of course, the advantages would have to be balanced against any differences in applicable marginal tax rates and other income-tested benefits.

Individuals should also consider whether funds needed for the year could be obtained from sources that do not impact AI at all, such as capital dividends, capital withdrawals from investments, trust distributions of capital, TFSA withdrawals, repayment of shareholder loans or obtaining new loans.

ACTION: Care should be taken to minimize the current year and future year clawbacks to Old Age Security payments.