Income Tax I - Textbook 2010

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Income Tax I – Textbook i

© 2010 H&R Block Canada, Inc.

Table of Contents

Foreword ............................................................................................................. 1

Chapter 1 – Preliminaries .................................................................................... 7

Evolution of the Canadian Income Tax System ........................................................ 9 Canadian Income Taxes Today ............................................................................. 10

Residence ................................................................................................................10 Self-Assessment System ...........................................................................................11 Progressive Tax System ............................................................................................11 Provincial Taxes ........................................................................................................11

Filing Requirements .............................................................................................. 12 Due Dates for Returns ..............................................................................................13

Income Subject to Tax .......................................................................................... 13 What is Income? ......................................................................................................13 Calculation of Income on a Tax Return .....................................................................15 Calculation of Federal Tax ........................................................................................15

The T1 Return ...................................................................................................... 16 The T1 General ........................................................................................................16 The T1 Special .........................................................................................................17 Making Correct Entries ............................................................................................18

Electronic Filing .................................................................................................... 18 EFILE........................................................................................................................19 TELEFILE ..................................................................................................................19 NETFILE ...................................................................................................................19

Records and Receipts ........................................................................................... 21 Identification ........................................................................................................ 21

Information about your residence .............................................................................22 Information about you .............................................................................................23 Information about your spouse or common-law partner ...........................................23

Elections Canada ................................................................................................. 24 Goods and Services/Harmonized Sales Tax (GST/HST) Credit Application ............... 25 Foreign Property .................................................................................................. 25 Summary ............................................................................................................. 27

Chapter 2 – Income from Employment ............................................................ 29

Introduction ......................................................................................................... 31 Employment Income ............................................................................................ 31 Information Slips .................................................................................................. 31

T4 Slips ....................................................................................................................32 Other Employment Income ......................................................................................36

Total Income ........................................................................................................ 40 Summary ............................................................................................................. 41

Chapter 3 – Employment Deductions and Credits .......................................... 43

Registered Pension Plan Contributions ................................................................. 45 Fully Deductible Contributions ..................................................................................45 Pre-1990 Past Service Contributions .........................................................................45

Annual Union, Professional or Like Dues .............................................................. 46

ii Income Tax I – Textbook


Moving Expenses ................................................................................................. 46 Distance Requirement ............................................................................................. 47 Net Earnings Limit ................................................................................................... 47 Purpose of Move ..................................................................................................... 47 Other Rules ............................................................................................................. 47 Deductible Moving Expenses ................................................................................... 48 Non-Deductible Moving Expenses ............................................................................ 49 Claiming the Deduction ........................................................................................... 49

Other Employment Expenses ................................................................................ 54 Repayment of Employment Income .......................................................................... 54

Employee Home Relocation Loan Deduction ........................................................ 55 Canadian Forces Personnel and Police Deduction ................................................. 55 Security Options Deductions ................................................................................ 56 Calculation of Net Income and Taxable Income .................................................... 58 Canada Pension Plan Contributions ..................................................................... 58

Employer Withholding ............................................................................................. 59 Underpayments, Overpayments, and Refunds .......................................................... 60 Proration Requirements ........................................................................................... 62

Employment Insurance Premiums ......................................................................... 64 Maximum Premiums ................................................................................................ 64 Employer Withholding ............................................................................................. 64

Provincial Parental Insurance Plan ......................................................................... 65 Canada Employment Amount .............................................................................. 66 Summary ............................................................................................................. 66

Chapter 4 – Dependants ................................................................................... 67

Personal Amounts ............................................................................................... 69 Dependants ......................................................................................................... 70

Support of Dependant ............................................................................................. 70 Definition of “Child” and “Parent” .......................................................................... 71 Definition of “Spouse” and “Common-law Partner” ................................................ 71 Same-Sex Partners ................................................................................................... 74

Basic Personal Amount ........................................................................................ 74 Spouse or Common-law Partner Amount ............................................................. 74 Amount for an Eligible Dependant ....................................................................... 75

Marital Status .......................................................................................................... 76 Support................................................................................................................... 76 Relationship ............................................................................................................ 76 Residency ................................................................................................................ 77 Under Eighteen or Infirm (Except for Parents or Grandparents) ................................. 77 Residing In and Maintaining the Dwelling ................................................................ 78 One Claim per Dwelling ........................................................................................... 78 Other Restrictions .................................................................................................... 78 Claiming the Amount .............................................................................................. 79

Amount for Children Under 18 ............................................................................ 80 Amount for Infirm Dependants Age 18 or Older .................................................. 81

Meaning of Infirmity ................................................................................................ 81 Restrictions ............................................................................................................. 81 Claiming the Amount .............................................................................................. 82

Caregiver Amount ............................................................................................... 83 Claiming the Amount .............................................................................................. 83

Income Tax I – Textbook iii


Public Transit Passes Amount ............................................................................... 84 Claiming the Amount ..............................................................................................85

Children’s Fitness Amount ................................................................................... 86 Children with Disabilities ..........................................................................................86

Federal Non-Refundable Tax Credits ..................................................................... 87 Goods and Services Tax/Harmonized Sales Tax Credit Application ......................... 87

Eligibility ..................................................................................................................88 Applying for the Credit ............................................................................................88 Calculating the Credit ..............................................................................................88 Determining the Credit ............................................................................................90

Canada Child Tax Benefit ..................................................................................... 91 Eligibility ..................................................................................................................91 Qualifying Children ..................................................................................................92 Family Income ..........................................................................................................92 Basic Benefit ............................................................................................................92 National Child Benefit Supplement ...........................................................................93 Child Disability Benefit Supplement ..........................................................................93 Application ..............................................................................................................93

Universal Child Care Benefit ................................................................................. 94 Repayment of UCCB Amounts .................................................................................94

Summary ............................................................................................................. 95

Chapter 5 – Calculation of Tax and Credits ..................................................... 97

Calculation of Tax ................................................................................................ 99 Federal Tax .......................................................................................................... 99

Federal Non-refundable Tax Credits ..........................................................................99 Federal Tax on Taxable Income ............................................................................... 100 Net Federal Tax ...................................................................................................... 101 Federal Political Contribution Tax Credit ................................................................. 101 Labour-Sponsored Funds Tax Credit ....................................................................... 102

Provincial Tax ..................................................................................................... 103 Refund or Balance Owing .................................................................................. 103

Calculation of Total Payable ................................................................................... 103 Calculation of Total Credits .................................................................................... 103 Total Income Tax Deducted .................................................................................... 104 Canada Pension Plan Overpayment ........................................................................ 104 Employment Insurance Overpayment ..................................................................... 104 Refundable Medical Expense Supplement ............................................................... 104 Working Income Tax Benefit (WITB) ....................................................................... 104 Employee and Partner GST/HST Rebate................................................................... 104 Tax Paid by Instalments .......................................................................................... 105 Provincial or Territorial Credits ................................................................................ 105 Refund or Balance Due .......................................................................................... 105 Professional Tax Preparers ...................................................................................... 105 Direct Deposit ........................................................................................................ 105

Summary ........................................................................................................... 108

Chapter 6 – Investment Income ..................................................................... 109

Schedule 4 and Schedule 3 ................................................................................ 111 Dividends from Taxable Canadian Corporations ................................................. 111

Dividends Received from Corporations ................................................................... 113 Dividends Allocated from an Employees’ Profit Sharing Plan (EPSP) .......................... 113

iv Income Tax I – Textbook


Dividends Allocated by Trusts and Estates .............................................................. 114 Dividends Not Paid in Cash .................................................................................... 114 Election to Include Spouse’s or Common-law Partner’s Dividends in Income ........... 116

Interest and Other Investment Income ................................................................ 117 Interest from Trust, Bank, or Other Deposits .......................................................... 117 Long-Term Investment Contracts ........................................................................... 118 Other Interest Income ............................................................................................ 118 Investments Made Before 1990 ............................................................................. 118 Record Keeping ..................................................................................................... 119 Change of Method ................................................................................................ 119 Canada Savings Bonds........................................................................................... 119 Regular Interest Bonds ........................................................................................... 119 Compound Interest Bonds ..................................................................................... 119 Interest on Treasury Bills ........................................................................................ 120 Foreign Investment Income .................................................................................... 121

Capital Gains ..................................................................................................... 122 Mutual Funds ........................................................................................................ 123

Attribution Rules ............................................................................................... 124 Transfers of Property to a Spouse or Common-law Partner ..................................... 125 Transfers of Property to Minor Children ................................................................. 126 Interest on Canada Child Tax Benefit and/or Universal Child Care Benefit Payments 126

Carrying Charges and Interest Expenses ............................................................. 127 Carrying Charges .................................................................................................. 127 Interest Expenses ................................................................................................... 127

Summary ........................................................................................................... 129

Chapter 7 – Social Benefits and Other Amounts .......................................... 131

Workers’ Compensation and Social Assistance ................................................... 133 Workers’ Compensation Payments......................................................................... 133 Social Assistance Payments .................................................................................... 134

Canada Pension Plan Benefits ............................................................................ 135 Lump-Sum CPP Benefits ........................................................................................ 136

Employment Insurance Benefits ......................................................................... 137 EI Benefits Repaid .................................................................................................. 138

Social Benefits Repayment ................................................................................. 139 Employment Insurance Clawback ........................................................................... 139 Clawback Calculation ............................................................................................ 139

Charitable Donations ......................................................................................... 140 Qualifying and Non-Qualifying Donations............................................................... 141 Gifts of Property .................................................................................................... 142 Gifts of Cultural Property ....................................................................................... 142 Artists ................................................................................................................... 142 Eligible Amount of Donations ................................................................................ 143 Donations Made By Spouse or Common-law Partner .............................................. 143 Members of Religious Orders ................................................................................. 143 Claiming Charitable Donations .............................................................................. 143

Legal Expenses .................................................................................................. 145 Additional Deductions ....................................................................................... 146

Income Exempt under a Tax Treaty ........................................................................ 146 Vow of Perpetual Poverty ...................................................................................... 146

Other Income .................................................................................................... 146 Death Benefits ...................................................................................................... 147

Income Tax I – Textbook v


Apprenticeship Incentive Grants (AIG) .................................................................... 147 Apprenticeship Completion Grant (ACG) ................................................................ 147 Gains from Theft or Embezzlement ........................................................................ 147 Other Amounts ...................................................................................................... 147

Working Income Tax Benefit .............................................................................. 148 Eligibility ................................................................................................................ 148 Eligible Spouse or Common-Law Partner ................................................................ 149 Eligible Dependant ................................................................................................. 149 Amount of Benefit ................................................................................................. 149 Working Income .................................................................................................... 149 Disability Supplement ............................................................................................. 149 Calculation of WITB benefit.................................................................................... 150 Prepayment ........................................................................................................... 152 Application for Prepayment .................................................................................... 152 Who Must Claim ................................................................................................... 152

Home Renovation Tax Credit .............................................................................. 153 Summary ........................................................................................................... 154

Chapter 8 – Taxpayers and Health ................................................................. 155

Disability Amount .............................................................................................. 157 Cumulative Effects of Significant Restrictions .......................................................... 158 Life-Sustaining Therapy .......................................................................................... 158 Dietary Disorders ................................................................................................... 158 Federal Disability Amount ...................................................................................... 171 Provincial Disability Amount ................................................................................... 171

Disability Amount Transferred from a Dependant ............................................... 171 Provincial Disability Transfer ................................................................................... 173

Amounts Transferred from Your Spouse or Common-law Partner ....................... 173 Provincial Disability Transfer to a Spouse or Common-law Partner ........................... 174

Registered Disability Savings Plans (RDSPs) .......................................................... 175 DTC-Eligible Individual............................................................................................ 175 Contributions ........................................................................................................ 175 Qualifying Individuals ............................................................................................. 175 Disability Assistance Payments ................................................................................ 176 Director of the Plan ................................................................................................ 176 Non-taxable Portion of RDSP Payments................................................................... 176 Plan Sustainability .................................................................................................. 177 Repayments ........................................................................................................... 177 Withholding taxes .................................................................................................. 177 Borrowing to Contribute ........................................................................................ 177 Income .................................................................................................................. 177 Withdrawal ........................................................................................................... 177 Government Support ............................................................................................. 177 Canada Disability Savings Grant (CDSG) ................................................................. 178 Canada Disability Savings Bond (CDSB) ................................................................... 178 Attribution Rules .................................................................................................... 178 Tax Free Rollovers .................................................................................................. 178 Repayment ............................................................................................................ 178

Medical Expenses ............................................................................................... 179 General Rules ........................................................................................................ 179 Qualifying Expenses ............................................................................................... 180 Non-Qualifying Expenses ........................................................................................ 183

vi Income Tax I – Textbook


Medical Expenses for Disabled Persons ................................................................... 184 Receipts and Documentation ................................................................................. 184 Claiming Medical Expenses .................................................................................... 184

Disability Supports Deduction ............................................................................ 186 Refundable Medical Expense Supplement .......................................................... 189 The Disability Amount and Nursing Home or Attendant Care ............................. 191 Gasoline Excise Tax Rebate ................................................................................ 193 Summary ........................................................................................................... 194

Chapter 9 – Registered Plans ......................................................................... 195

Registered Retirement Savings Plans .................................................................. 197 RRSP Contributions ............................................................................................ 197

Deduction Limit ..................................................................................................... 198 Past Service Pension Adjustment (PSPA) ................................................................. 200 Claiming the RRSP Deduction ................................................................................ 201 Undeducted RRSP Contributions ............................................................................ 201 RRSP Excess Contributions ..................................................................................... 202 Withdrawal of Undeducted Contributions .............................................................. 203 Spousal or Common-law Partner RRSPs ................................................................. 204 Canada Savings Bonds........................................................................................... 205 RRSP Transfers ...................................................................................................... 205

The Home Buyers’ Plan ...................................................................................... 205 Home Buyers’ Plan Withdrawals ............................................................................ 205 RRSP Contributions Made Within the Withdrawal Period ........................................ 207 Repayments .......................................................................................................... 209

First-time Home Buyers’ Tax Credit ..................................................................... 210 Lifelong Learning Plan........................................................................................ 211 Tax-Free Savings Accounts ................................................................................. 212

Withdrawals .......................................................................................................... 213 TFSA Investments .................................................................................................. 213

Summary ........................................................................................................... 214

Chapter 10 – Taxation and Family Situation ................................................. 215

Getting Married or Establishing a Common-law Relationship ............................. 217 Separation in the Year ....................................................................................... 217 Support Payments ............................................................................................. 218 Taxable/Deductible Support Payments ................................................................ 218

Written Agreement ............................................................................................... 219 Prior Payments ...................................................................................................... 219 Fixed and Periodic Payments .................................................................................. 220 Specific-Purpose and Third-Party Payments............................................................. 220 Ordering of Deductible/Non-deductible Support Payments ..................................... 221 Support Payments and Personal Amounts .............................................................. 222 Repayments of Support ......................................................................................... 223 Legal Fees ............................................................................................................. 223

Adoption Expenses ............................................................................................ 223 Adoption Period .................................................................................................... 224 Eligible Adoption Expenses .................................................................................... 224

Child Care Expenses .......................................................................................... 225 Purpose of Child Care ........................................................................................... 225 Eligible Child ......................................................................................................... 225

Income Tax I – Textbook vii


Eligible Payments ................................................................................................... 225 Eligible Claimants................................................................................................... 227 Form T778 ............................................................................................................. 228 Part A – Total child care expenses ........................................................................... 228 Part B – Basic limit for child care expenses deduction .............................................. 229 Part C – Are you the person with the higher net income? ....................................... 229 Part D – Are you enrolled in an educational program in 2009? ................................ 233 Child Care and the Canada Child Tax Benefit ......................................................... 234 Child Care and the Disability Supplement ............................................................... 234 Child Care Receipts ................................................................................................ 234 Child Care Expenses and Children’s Fitness Amount ............................................... 234 Child Care and Marital Status Change .................................................................... 235 Putting the Rules into Practice ................................................................................ 236

Personal Amounts .............................................................................................. 237 Spouse or Common-law Partner Amount ............................................................... 237 Amount for an Eligible Dependant ......................................................................... 239

Amount for Children Under 18 .......................................................................... 241 Caregiver Amount and Amount for Infirm Dependants 18 or Over .......................... 242 Amounts Transferred from Your Spouse or Common-law Partner (Schedule 2)........ 242

GST/HST Credit .................................................................................................. 242 Canada Child Tax Benefit ................................................................................... 243 Universal Child Care Benefit ............................................................................... 243 Summary ........................................................................................................... 244

Chapter 11 – Students .................................................................................... 247

Income .............................................................................................................. 249 Scholarships, Fellowships, Bursaries, and Achievement Prizes .................................. 249 Training Allowances ............................................................................................... 250 Registered Education Savings Plan Payments .......................................................... 250 Canada Education Savings Grant ............................................................................ 251 Canada Learning Bond ........................................................................................... 252 Lifelong Learning Plan ............................................................................................ 253

Student Loan Interest ......................................................................................... 253 Tuition Fees ....................................................................................................... 254

Deemed Residents ................................................................................................. 255 Receipts ................................................................................................................. 256 Claiming the Tuition Credit .................................................................................... 256

Education and Textbook Amounts ..................................................................... 258 Designated Educational Institution.......................................................................... 259 Information Slips .................................................................................................... 259 Claiming the Education and Textbook Amounts ..................................................... 260

Schedule 11 Federal Tuition, Education and Textbook Amounts ......................... 260 Transfer of Tuition, Education and Textbook Amounts ....................................... 260

Designated Person ................................................................................................. 260 Transfer Amount ................................................................................................... 262 Provincial Tuition Fees and Education Amounts ....................................................... 264

Moving Expenses ............................................................................................... 264 Adult Basic Education Assistance ........................................................................ 264 Summary ........................................................................................................... 265

viii Income Tax I – Textbook


Chapter 12 – Senior Citizens .......................................................................... 267

Old Age Security Benefits ................................................................................... 269 Repayment of Old Age Security Benefits ................................................................ 270

CPP Retirement Benefits .................................................................................... 271 Division of CPP Benefits between Spouses or Common-law Partners....................... 272

Pension Income ................................................................................................. 273 RPP Income ....................................................................................................... 274

RPP Periodic Payments ........................................................................................... 274 RPP Lump-sum Payments ....................................................................................... 274

DPSP Income ..................................................................................................... 275 DPSP Annuity or Instalment Payments .................................................................... 275 DPSP Lump-sum Payments..................................................................................... 275

Foreign Pensions ................................................................................................ 275 RRIF Income ....................................................................................................... 276

Spouse or Common-law Partner as Beneficiary of the RRIF ..................................... 277 Other Payments from a RRIF .................................................................................. 278

Unregistered Annuities ...................................................................................... 278 Income-Averaging Annuity Contracts ................................................................. 279 Retirement Compensation Arrangements........................................................... 279 RRSP Income ..................................................................................................... 280

RRSP Annuity Payments ......................................................................................... 280 Other Payments from an RRSP ............................................................................... 281

Retiring Allowances ........................................................................................... 283 Transfers to Registered Plans .............................................................................. 284

Direct Transfers ..................................................................................................... 285 Indirect Transfers ................................................................................................... 287 Retiring Allowances ............................................................................................... 287

Non-Refundable Credits .................................................................................... 289 Age Amount ......................................................................................................... 289 Pension Income Amount ........................................................................................ 289 Amounts Transferred from Your Spouse or Common-law Partner ........................... 290 Provincial Credits ................................................................................................... 292

Pension Income Splitting .................................................................................... 293 Eligible Income for Pension Income Splitting ........................................................... 293 Making the Election .............................................................................................. 293 Benefits of Pension Income Splitting ...................................................................... 297 Drawbacks of Pension Income Splitting .................................................................. 297 Net and Total Family Income Effects ....................................................................... 298

Instalment Payments .......................................................................................... 298 Liability ................................................................................................................. 298 Instalment Dates ................................................................................................... 298 Interest and Penalty on Instalments ........................................................................ 298 Instalment Amounts .............................................................................................. 299 Current Year Method ............................................................................................ 299 Prior Year Method ................................................................................................. 299 Instalment Reminder Method ................................................................................ 300 Making Instalment Payments ................................................................................. 301 Claiming Instalment Payments ............................................................................... 301

Summary ........................................................................................................... 301

Income Tax I – Textbook ix


Chapter 13 – Administration .......................................................................... 303

Submitting the Return ........................................................................................ 305 What Happens after Filing? ................................................................................ 305

Processing the Return ............................................................................................ 305 Amending a Return............................................................................................ 307

Form T1-ADJ ......................................................................................................... 307 Assessment, Objections, and Appeals ................................................................. 310 Interest and Penalties ......................................................................................... 310 Refunds ............................................................................................................. 311 Elections ............................................................................................................ 311 Summary ........................................................................................................... 312

Glossary ........................................................................................................... 313

Index ................................................................................................................ 321

Income Tax I – Textbook 1


Foreword

Introduction Welcome to the 2010 H&R Block Income Tax Course. This introductory income tax course presents in-depth coverage of the information needed to prepare the majority of individual income tax returns for residents of Canada. The knowledge you acquire in this course will be valuable to those of you who want to prepare your own tax returns, as well as to those of you who want to become tax return preparers.

At the conclusion of this course, you will be able to:

Complete most basic personal income tax returns.



About This Course Income Tax I is the core segment of the introductory Income Tax Course. Chapters 1 through 5 focus on how to complete very simple tax returns. Chapters 6 through 12 go through the tax return again, this time dealing with more complex tax situations. Finally Chapter 13 deals with important administrative issues related to tax return preparation. If you have no previous experience with personal income tax return preparation, this organization offers a systematic progression through the most important topics. Alternatively, if you have some familiarity with tax returns, this course will clarify your knowledge, expanding on concepts you already know. This course does not deal with advanced tax subjects, but some are examined briefly as they relate to the material you are studying. Greater knowledge of these tax matters can be obtained through experience, independent research and study, and, if you work for H&R Block, by taking some or all of the more advanced courses. Because 2010 tax forms are not released until late in the year, and the current budget proposals on which 2010 returns will be based are subject to change, the course is based on 2009 returns and rules. However, confirmed changes in tax rates and other amounts for 2010 are provided in the TTS Reference Book. As a result, when you have completed the course you will be conversant with both 2009 and 2010 tax information. Your Income Tax I course materials include: Income Tax I text book (this book); Income Tax I exercise book (containing questions and answers for each chapter in

the text); TTS Reference Book; and the provincial/territorial supplement for your province or territory. Income Tax I focuses on federal tax, and contains examples and figures that clarify the tax theory presented. The exercise book provides a series of questions, along with the answers to those questions, so that you can check both your progress and understanding of the material. The TTS Reference Book provides specific facts and figures, such as credits and deductions that relate to specific years. It also contains charts, federal tax forms, and copies of various information slips with instructions on how to handle amounts reported on them. You will find it a useful reference tool. The provincial/territorial supplement focuses on provincial and territorial tax. As you progress through the text, your instructor will point out where the provincial or territorial tax rules or amounts for your jurisdiction differ from the federal rules or amounts. Consequently, at the end of this course, you will be able to calculate both federal and provincial tax.

4 Foreword


The course materials are yours to keep. Therefore, you should feel free to highlight, underline, and reorganize to suit your own needs. For example, some students prefer to have all the Chapter 1 materials together (text, exercises, answers), followed by Chapter 2, etc. Some find it helpful to add index tabs to divide the book into sections so that it is easier to find information. Do whatever helps you to learn better or faster. To help you in your study, at the end of each chapter you will find a summary that outlines the important concepts in the chapter. The text book also contains a glossary of tax terms, in case you need to refresh your memory as to the meaning of a specific tax term, as well as an index, to help you locate information quickly. Occasionally, you will find references to CRA material that corresponds to material covered in the text. These references are denoted by the following symbol:

2009 General Income Tax and Benefit Guide, page x

The text also makes references to forms, slips, or charts in the TTS Reference Book. These references are indicated as follows:

T4 slip

Periodically you will see the statement

Complete QX to QY before continuing to read.

This statement directs you to questions relating to the material you have just studied. The questions are found in the first section of the exercise book. Some are designed to draw attention to an important rule. Others invite you to think through a procedure or rule and put it to use. You are invited to answer these questions, using the text book as a reference, and then compare your responses with the answers found in the second section of the exercise book. This will enable you to find out immediately whether or not you understand the material you are studying. You will obtain the greatest benefit if you complete each question before looking at the answer: merely copying the answers is not generally helpful. If you are unable to answer a question, study the answer in the exercise book to clarify the material. If you are still uncertain about the material, reread the text, then attempt the question again. Finally, note whatever questions you have and ask your instructor for assistance at the next class meeting.

Chapter Review Problems A Chapter Review Problem is furnished for each chapter except Chapter 1. The review problems for the next six chapters present you with the opportunity to analyze a tax situation and then complete part or all of a tax return. The review problems for the last six chapters concentrate on tax theory. You will obtain the greatest benefit from these problems if you attempt to complete them before they are discussed in class. In doing so, be sure to refer to your text, to other sources of information, such as the Canada Revenue Agency (CRA) tax guides, or to your class notes. Each review problem concentrates on the material in the chapter just studied, but also draws on information from preceding chapters.



In addition, many chapters have an Optional Review Problem. Similar in design to the Chapter Review Problems, they offer you the opportunity for additional practice.

Assignments and Homework At the end of each class meeting, the instructor will tell you what material will be covered in the next session, and may suggest passages of particular interest or importance. If at all possible, you should try to read some or all of the material suggested and, if time permits, complete the related exercise questions. Although there are no minimum homework requirements for this course, the amount you learn will, nevertheless, be partly dependent upon the time and effort you put forth. To gain the most from the course, therefore, we recommend that you arrange time to read and study the text on a regular basis. Plan each study period so that you can complete a specific group of questions, since the questions provide convenient stopping places.

Grading Two self-tests provided during the course will help you evaluate your progress and your understanding of the course material. There are two application problems to be submitted for marking and a final exam at the end. The exam will be open book, which means that you need not memorize information. Instead, you should concentrate on understanding tax theory, and on knowing where and how to find specific tax information when you need it. The course grade will be calculated as follows: 20% for each marked assignment, and 60% for the final exam grade.

Evaluations H&R Block hopes that you will find the Income Tax Course rewarding and enjoyable. So that we will know your feelings about what we are doing right and what we can improve, we ask that you complete the Student Evaluation Form at the end of the exercise book. Please write down your comments as you proceed through the course. At the end, your instructor will collect the evaluation forms and forward them to the District Manager for review.



Chapter 1 – Preliminaries

Introduction This chapter introduces you to the Canadian personal income tax system.

At the conclusion of this chapter, you will be able to:

Explain the evolution of levying personal income taxes in Canada, and what it is like today;

Determine who is required to file a tax return and why some individuals should file even though not required to do so;

Determine what income is subject to tax; Differentiate between total income, net income and taxable income; Explain the due date and the four available methods for filing an individual’s tax

return; and Complete the identification area of an individual’s tax return.

Glossary Before you read this chapter, review the following terms in the glossary: Non-refundable tax credits; Refundable tax credits; Taxable income; and Taxation year.



Evolution of the Canadian Income Tax System Before Confederation, most government revenue came from customs and excise duties. As early as 1650, for example, Louis XIV of France levied export taxes of 50% and 10%, respectively, on beaver pelts and moose hides leaving his northern American colonies. A century later, Nova Scotia imposed customs duties on sugar, bricks, lumber, and billiard tables. Excise taxes were levied on tea, coffee, and playing cards. The British North America Act gave the newly formed Canadian Parliament unlimited power of taxation. The power remained largely unused, however, since customs and excise duties still provided for most Dominion expenses. In 1867, the new government simply increased excise duties on liquor and imposed a tax on beer, malt, cigarettes, cigars, and snuff. In 1870, existing taxes were raised and new import duties on vinegar, wheat, and grain were levied. At Confederation, provinces were given the power to impose direct taxes for provincial purposes. Over the next fifty years, the provinces taxed horses, dogs, cars, gasoline, salmon, canaries, race-tracks, foxes, circuses, traveling shows, restaurants, bowling alleys, and poolrooms. British Columbia levied an income tax and a land tax; Québec imposed corporation taxes; Ontario imposed succession duties; and Prince Edward Island levied both a property tax and an income tax. In 1914, Canada declared war against Germany. At that time, customs and excise duties still provided 90% of total Dominion government revenue. To finance the war effort, the federal government in 1916 imposed a corporation tax known as the Business Profits War Tax. In 1917, the Income War Tax Act, described by the Borden government as a temporary measure, was introduced, much to the dismay of the provinces that had come to believe that only they, and not the federal government, had the right to impose direct taxes. Unfortunately, the end of the war did not end the need for additional revenue: hospitals for the wounded, homes for the permanently disabled, and pensions for veterans all had to be funded. In addition, the railway that the government had acquired as a result of the war now had to be operated on a much larger scale in order to better serve the national economy. As a result, the new taxes remained in place. A decade later, in 1927, the government created the Department of National Revenue to administer the growing tax system. In 1930 only three provinces levied taxes on personal income. However, during the 1930’s provincial responsibilities were increased by a variety of court decisions, but no corresponding new sources of revenue were provided. The unsurprising result was that by 1939, seven provinces imposed personal income taxes. For some taxpayers, the provincial taxes were just as high as the federal taxes, which themselves had risen during the decade. The recommendations of the Rowell-Sirois Commission, set up in 1937 to define the responsibilities of the provincial and federal governments and to reorganize the tax system, were still under discussion when World War II began.

10 Chapter 1 – Preliminaries


With the outbreak of World War II, the federal government found that its expenditures greatly exceeded its revenue. In 1941, the provinces surrendered personal and corporate income tax collection to the federal government for the duration of the war plus one year. In exchange, the provinces received fixed annual “rental payments” from the federal government. “Pay as you earn” tax deductions began in 1942. This meant that employers withheld tax from their employees’ pay and remitted it to the government. Self-employed taxpayers were required to pay their tax by instalments. On January 1, 1949, the Income War Tax Act was repealed and the Income Tax Act came into effect. Since then, the Income Tax Act has undergone some major reforms and many small revisions, but its basic structure has remained intact.

Canadian Income Taxes Today The federal and provincial governments still have the authority to impose direct taxes. Income tax is, in fact, levied on taxable individuals by the federal government and the governments of all ten provinces and three territories. In 1962, the federal and provincial governments established the Tax Collection Agreements, which allow the provinces to impose their own individual income taxes and to accept federal tax collection and administration of the tax system. The result is that, in all provinces except Quebec (which has operated its own personal income tax system since 1954), taxpayers complete only one income tax return each year. On November 1, 1999, Revenue Canada was replaced by the Canada Customs and Revenue Agency (CCRA). The purpose of the change was to streamline the federal and provincial systems to reduce the overlap and duplication of various programs. In December 2003, the CCRA, which was responsible for customs as well as revenue, was split into the Canada Border Services Agency which deals with customs and the Canada Revenue Agency (CRA) which is responsible for administration of the tax laws. As a result of this change, many tax programs that were previously administered by the provinces are now administered by the CRA. The Income Tax Act is still administered by the Department of National Revenue with the minister of that department remaining accountable to parliament for the administration of the CRA. In addition to collecting federal tax payable, the CRA continues to collect tax payable to all the provinces and territories (except Quebec) and turns those amounts over to those jurisdictions.

Residence The Canadian Income Tax Act, unlike the equivalent legislation in a number of other countries, uses residence, not citizenship, as a criterion to determine how an individual’s income is taxed. For income tax purposes, an individual is either: a full-year resident (resident throughout the year); a non-resident (not resident at any time during the year); or a part-year resident (resident for part of the year and not resident for part of the

year).



This course, Income Tax I, deals only with the preparation of tax returns for full-year residents. Non-residents and part-year residents are covered in other courses.

Self-Assessment System In many countries, tax calculations and deductions are made strictly at source by employers or government tax collectors, and no tax return is filed at the end of the year. Canada, however, has a self-assessment income tax system which requires taxpayers to determine their own tax liability each year. Under our self-assessment income tax system, taxable individuals are required to determine their taxable income for each taxation year, and then calculate their tax payable. This amount is compared with tax already paid and if the total credits exceed tax payable, the excess is refunded; if the total credits are less than the amount payable, the taxpayer must pay the balance owing. These calculations must be carried out on an income tax return that must be filed with the government.

Progressive Tax System Canada’s present system is called a “progressive” tax system because it imposes low rates of tax on low incomes and progressively higher rates of tax on higher incomes. For 2009, the federal tax rates were 15% on income of $40,726 or less; 22% on income between $40,726 and $81,452; 26% on income between $81,452 and $126,264; and 29% on income over $126,264. Underlying the system of progressive taxation is the belief that low-income persons should pay relatively less tax because they are obligated to spend a relatively high proportion of their income on the necessities of life; high-income persons, on the other hand, have more discretionary income with which, among other things, they can pay tax. One of the problems with our current progressive system, however, is that it levies tax individually, not on a family basis. As a result, a family in which one spouse earns $80,000 will pay several thousand dollars more in tax than a family in which each spouse earns $40,000, even though the gross family income is the same in each case. This is because, in the first situation, about half the income is taxed at a federal rate of 15%, and the rest at 22%, while in the second situation, all the income is taxed at 15%.

Provincial Taxes Outside Québec, provincial/territorial taxes and credits are calculated on special forms, and then added to the federal totals, so that the refund/balance due calculated on the federal return includes both federal and provincial taxes. In Québec, however, provincial tax is calculated on a special return that is filed with the Québec government, so the refund/balance due on the federal return includes only federal taxes. In this book, we focus on federal taxes only. However, you will receive a special supplement that covers provincial/territorial tax for your jurisdiction. As you progress through the course, your instructor will point out where the provincial/territorial tax rules and calculations differ from the federal tax rules and calculations.



Complete Q1 to Q4 before continuing to read.

Filing Requirements The Income Tax Act defines a “taxpayer” as “any person whether or not liable to pay tax.” It defines “person” to include “any body corporate and politic, and the heirs, executors, administrators or other legal representatives of such person.” Therefore human beings, corporations, and trusts can be taxpayers, and a taxpayer might or might not in fact have any tax to pay. This course deals only with taxation of individuals; taxation of corporations and trusts are dealt with in other courses. An individual taxpayer must file a tax return for a taxation year if he or she: has tax owing; disposed of capital property or had a taxable capital gain; is required to repay all or a portion of any Old Age Security benefits or

Employment Insurance benefits received; has withdrawn amounts under the Lifelong Learning Plan or the Home Buyers’

Plan that have not been repaid; is required to make Canada Pension Plan contributions because pensionable

wages and/or self-employment earnings total more than the basic CPP exemption ($3,500 for 2009);

received a demand from the CRA to file a return; claimed a capital gains reserve on last year’s return; incurred a non-capital loss and wants to be able to apply it to other years; wants to carry forward unused amounts from the current year return, such as

tuition fees, education amount or RRSP contributions; wants to claim a refund; wants to report income in order to keep his or her RRSP deduction limit up to

date (even in the case of children); wants to apply for the goods and services tax credit or harmonized sales tax

credit; wants to continue receiving the Canada Child Tax Benefit (in this case, if the

individual is married or living common-law, the individual’s spouse must also file a return); or

applied for and received advanced Working Income Tax Benefit payments in 2009 or wants to apply for advance payments in 2010.

As a practical matter, even if none of the above circumstances apply, a taxpayer may still benefit from filing a return. For example, if any doubt exists as to whether a person owes tax, filing a return will avoid a possible late-filing penalty. Self-employed taxpayers and persons with rental income should file to maintain a continuity of tax information both for themselves and for the CRA. Other individuals may wish to file returns to expedite application for income-dependent benefits, such as provincial income supplements for seniors and student loans.



Due Dates for Returns For individuals, the taxation year is always the calendar year, January 1 through December 31. Tax returns for a given taxation year are ordinarily due on or before April 30 of the following year. Any tax owing must also be paid by that date, or interest will be charged on the unpaid amount from that date forward. The filing due date is extended to June 15 for self-employed taxpayers and spouses or common-law partners of self-employed taxpayers. In spite of the extended deadline, however, interest will still be charged on any balance that is not paid by April 30.

2009 General Income Tax and Benefit Guide, page 5

Illustration 1.1

Caroline is self-employed. Therefore, the due date for her 2009 return is June 15, 2010. However, if she has tax owing, she should pay it by April 30, 2010, to avoid interest charges.


Income Subject to Tax Amounts of income from all sources inside or outside Canada — whether received in cash, as goods, or as services — are taxable to a resident of Canada unless specifically exempt.

What is Income? The Concise Oxford Dictionary (7th ed., 1982) defines income as “periodical receipts from one’s business, lands, work, investments, etc.” The Gage Canadian Dictionary (1983) defines income as “what comes in from property, business, work, etc.; receipts; returns.” These general definitions are made more specific for use in taxation. In a somewhat roundabout way, the Income Tax Act defines income as the aggregate of amounts that are: 1. income from an office or employment; 2. income from a business or property; 3. capital gains; and 4. other sources of income as specified by the Income Tax Act (pension benefits or

the Universal Child Care Benefit, for example). This definition is the basis of our discussion of income reportable for income tax purposes.



Amounts Not Included in Income Although the above definition of income is fairly comprehensive, there are some types of income which the Income Tax Act explicitly states are not to be included when computing a taxpayer’s income for the year. In addition, there are other types of income that are not included simply because they do not fall under any of the broad categories of income described in the Income Tax Act. These types of income are never entered anywhere on the tax return. Commonly encountered amounts of this kind include: gifts and inheritances; lottery winnings; winnings from betting or gambling for simple recreation or enjoyment; strike pay; compensation paid by a province or territory to a victim of a criminal act or a

motor vehicle accident; certain civil and military service pensions; war disability pensions; RCMP pensions or compensation paid in respect of injury, disability, or death; scholarship, fellowship and bursary income for a program for which the taxpayer

is eligible to claim the education amount income of First Nations people, if situated on a reserve; profit from the sale of a taxpayer’s principal residence; provincial child tax credits or benefits and Québec family allowances; the goods and services tax or harmonized sales tax credit (GST/HST credit); the Canada Child Tax Benefit; and beginning in 2009, investment income earned from a Tax-Free Savings Account

(TFSA).




Calculation of Income on a Tax Return The calculation of income on a tax return proceeds in an orderly way, as described below:

Total Income Income from all sources is entered on the return, except for those types of income that are not reportable for tax purposes (such as the ones listed above). In most cases, gross income from a source is entered (for example, employment income); in a few cases both gross and net from a source are entered (for example, gross and net rental income); and in rare cases, only net income from a source is entered (for example, research grants). The sum of income from all reportable sources comprises total income for tax purposes.

Net Income Net income is what the Income Tax Act refers to as a taxpayer’s “income for the year.” It is a person’s total income from all reportable sources, minus specified allowable deductions. Net income is important because it is used to calculate eligibility for many tax credits and social benefits, such as the GST/HST credit, personal amounts for dependants, and the Canada Child Tax Benefit.

Taxable Income Taxable income is the income on which tax is levied. This may not be the same as net income, since the Income Tax Act allows certain deductions from net income to arrive at taxable income. Two of these, the employee home relocation loan deduction and the security options deductions, you will learn about in Chapter 3. In addition, the following types of non-taxable income are deducted after the net income line: worker’s compensation payments; social assistance payments; net federal supplements; and income exempt by tax treaty. Such non-taxable amounts are discussed in more detail in Chapters 7 and 12. Taxable income is the net result found after subtracting all the applicable deductions from net income.

Calculation of Federal Tax Federal tax is calculated as a percentage of taxable income. The federal tax rates are 15%, 22%, 26%, and 29%, and they increase as taxable income increases. The resulting tax is then reduced by the taxpayer’s non-refundable credits to arrive at net federal tax. Non-refundable credits are based on the taxpayer’s personal and family situation and serve to reduce tax owing. However, they are not refunded to the taxpayer if they exceed the tax owing. Refundable tax credits are then used to offset tax owing; however, unlike non-refundable credits, if they exceed the tax owing, any excess amount is refunded to the taxpayer.




The T1 Return A “tax return” is the form prescribed by the CRA for the reporting of income, and is designed to provide the information necessary to assess a person’s liability for tax. The tax return for individuals is called a T1 Income Tax and Benefit Return. The CRA presently produces two versions of the T1: The T1 General and the T1 Special. This course focuses on the preparation of the T1 General return since anyone who can prepare it can prepare the other.

The T1 General There are several variations of the T1 General for ordinary residents of Canada; each one is unique due to provincial regulations. In this text, we will use the generic T1 General for most of Canada, since the focus is on federal tax only. Your instructor will provide you with information on the minor variations applicable to your specific province or territory, where applicable. The T1 General can be used to calculate the tax payable by individuals with any type of income, deduction, or credit. It is divided into the following sections: Identification; Elections Canada questions; Goods and services tax/harmonized sales tax (GST/HST) credit application; Foreign property question; Total income; Net income; Taxable income; and Refund or balance owing. Study the T1 General (shown in the TTS Reference Book) to see the role each section plays as you read through this section.

T1 General, page 1

Taxpayers are asked to enter identifying information about themselves, their residences, and their spouses or common-law partners (if applicable). They are then asked to respond to the Elections Canada questions, and whether they wish to apply for the GST/HST credit (this credit is discussed in Chapter 4).

T1 General, page 2

At the top of page 2, the taxpayer is required to disclose foreign property holdings with a total cost of more than $100,000. Next, in the “Total income” section, taxpayer’s are required to itemize and add their income from all sources to arrive at their total reportable income for tax purposes.



T1 General, page 3

The “Net income” section allows taxpayers to deduct specified items from total income to arrive at net income. The “Taxable income” section allows taxpayers to deduct still other items to arrive at taxable income.

T1 General, page 4

The last page involves the calculation of refund or balance due. Federal tax payable is determined by applying the appropriate tax rate(s) and subtracting non-refundable tax credits. This calculation is done on a separate schedule and the result is entered on page 4 of the T1 jacket, along with provincial tax (in provinces other than Québec). After entering the tax deducted or paid by instalments, along with other refundable credits, the total credits are compared to the total tax payable, resulting in either a balance owing or a refund.

Other Forms and Schedules The T1 General has eleven supplementary schedules (twelve in Quebec) that are used to itemize various types of income or deductible expenses, or to calculate various taxes or tax credits. Only those schedules relating to an individual’s particular tax situation should be filed with the T1 General. Many other forms are also produced by the CRA, relating to various types of income, credits or deductions. These should also be completed and attached to the return as required by circumstances. Taxpayers outside Québec must complete the provincial or territorial tax form(s) for the province or territory in which they reside on December 31, and include the resulting amounts on page 4 of the T1 General. Taxpayers in Québec must complete a special provincial return (called the TP-1) which is submitted separately to the government of Québec. The completion of these forms is covered in the provincial/territorial supplement you received as part of this course.

The T1 Special The T1 Special is created by omitting several lines found on the T1 General. The T1 Special is therefore restricted to certain categories of employees, pensioners, or individuals filing only to obtain provincial credit refunds, the Canada Child Tax Benefit, or to apply for the GST/HST credit. The regular T1 Special, while simplified, still requires the calculation of federal and provincial tax. However, certain groups of taxpayers receive an even simpler “no-calculation” T1 Special that does not require the calculation of tax. Each year the CRA selects the individuals to be mailed a T1 Special through an examination of the previous year’s returns. However, a taxpayer who is mailed a T1 Special might not be eligible to use it if his or her tax situation has changed since the preceding year. The specific rules of eligibility are found in the guide that comes with the form. If a taxpayer is ineligible to use the T1 Special, a T1 General must be filed.



The T1 Special returns have two important drawbacks: Taxpayers might not apply for a deduction simply because the form does not

show it. For example, none of the T1 Specials have a line for employment expenses. If someone completes the return by “following the lines” rather than carefully reading the eligibility conditions in the guide, he or she might not realize that employment expenses may be deductible.

Taxpayers who receive “no-calculation” T1 Specials and who do not calculate their own tax are not aware of their tax liability until after the CRA processes their returns. The CRA promises to process returns “as quickly as possible,” but not necessarily by April 30. If a taxpayer has a balance owing and the return is not processed until after April 30, the CRA will charge the taxpayer interest on the unpaid amount owing.

Making Correct Entries All taxpayers are responsible for providing complete and accurate information on their returns, so that their income, deductions and credits may be correctly determined. Filing a complete return means reporting all income that is required by law to be reported. Fortunately, many types of income are summarized and recorded on information slips, which makes the task much easier. However, failure to receive an information slip does not excuse a taxpayer from reporting income. The onus is always on the taxpayer to keep track of and report all income received, regardless of whether or not an information slip is received. Filing an accurate return means entering all information accurately, legibly and on the correct lines. Solid black dots next to some data fields indicate that dollars and cents, not rounded amounts, must be entered. The areas to the right of the data fields are usually blank. Do not write in these areas. The taxation centres use these areas to make corrections during processing.


Electronic Filing After a return is correctly prepared it must be filed (that is, delivered to the CRA). Many taxpayers file their returns by mailing a paper copy of the return to their regional taxation centres. However, since 1990, increasing numbers of taxpayers have been filing their returns electronically and, in 2009, more than 13 million taxpayers took advantage of electronic filing options. CRA’s electronic filing system is designed to only accept the current tax year’s return therefore any tax return other than the current year must be paper filed to regional taxation centres. From the taxpayer’s point of view, the benefits of electronic filing are increased speed and accuracy. The system also saves the taxpayer the cost of postage, and reduces the possibility of delay arising from postal service disruption or backlog at the CRA. From the CRA’s point of view, processing costs are reduced: they have a



smaller printing bill, and fewer employees to pay. There are currently three electronic filing options available; each of these is explained below.

EFILE EFILE is an electronic system that allows registered electronic filing service providers to send individual tax return information to the CRA electronically. In this system, taxpayers bring their documents to an EFILE service provider, such as H&R Block, who prepares the electronic return and transmits it to the CRA over the internet. All individuals who meet specified criteria are allowed to EFILE their returns. The CRA states that about 95% of individuals meet these criteria; some notable exceptions are non-residents, people who have declared bankruptcy, and those who have to pay tax to more than one province or territory. Since there are no signatures on an EFILE return, the CRA requires that taxpayers attest to the accuracy of the tax information being transmitted by signing Form T183 Information Return for Electronic Filing (see Illustration 1.2). EFILE agents must make sure the form is completed and signed by the taxpayer before the return is transmitted, and must present the form to the CRA upon request.

TELEFILE TELEFILE is an automated process that allows selected taxpayers with simple returns to transmit their income tax information to the CRA by telephone. TELEFILE is designed to accept only certain types of income, deductions and tax credit amounts; therefore, not everyone is eligible to use it. Qualifying taxpayers receive a TELEFILE invitation with their income tax packages, along with an access code, and instructions on how to use the service. Taxpayers using the TELEFILE service must first complete their tax returns in the usual way. Then they phone the CRA, using a touch-tone phone, and enter their tax information using the numbers on the telephone key pad. Upon completion, callers receive a number confirming receipt of their tax information.

NETFILE NETFILE enables taxpayers to send their returns to the CRA electronically using the Internet. While most Canadians are eligible to file under this system, non-residents, taxpayers with business income outside their province or territory of residence, or taxpayers in bankruptcy are ineligible. Taxpayers using NETFILE must first complete their returns using NETFILE-certified software. They then obtain access to the CRA’s transmission Web site for filing their tax returns by inputting the Web Access Code (WAC) which they received on the mailing labels sent to them with their forms package.





Illustration 1.2



Records and Receipts Regardless of whether a return is filed on paper, or electronically through EFILE, TELEFILE, or NETFILE, the Income Tax Act requires all taxpayers to keep records that are adequate to determine the amount of tax that must be paid. The type of documentation required varies with circumstances. Sometimes ordinary receipts and records are adequate; at other times “official” receipts or certificates are required. For EFILE returns, all required receipts or certificates must be shown to the EFILE service provider who will verify that they meet the CRA’s specifications. For paper returns, certain required receipts or documentation must be attached to and submitted with the return so they can be verified by the CRA. Any required receipts or documentation that are not sent in must be kept on hand and produced if the CRA asks to see them. All such tax records must be kept for a period of at least six years. Keeping accurate records is a matter of self-interest, as in case of any dispute between the CRA and a taxpayer, the CRA is presumed by law to be correct unless the taxpayer can prove otherwise.


Complete Q19 before continuing to read.

Identification Whether prepared on paper or by computer, an income tax return should be completed in an orderly fashion to ensure all income is reported and all applicable deductions and credits are claimed. The first step is to complete the identification section of the return. The information requested identifies the taxpayer for income tax purposes, and provides personal information that directly affects how tax is calculated, such as province of residence, marital status and date of birth. Accuracy is as important in preparing the identification section as it is in preparing any other part of the return. Taxpayers who did not have their returns prepared by a tax professional the previous year receive from the CRA a package containing the tax forms they require. Each package includes personalized labels that contain the following information about the taxpayer: name and address; social insurance number (SIN); and spouse’s or common-law partner’s SIN, if applicable.



When filing a paper return, always attach the personalized label, even if some of the information is incorrect. To make a correction, simply cross out the incorrect information and print the change clearly on the label. Some taxpayers will not receive a tax return package in the mail (for example, a person who is filing for the first time). Such an individual can pick up a return at the post office or local CRA tax services office. In this case, complete the identification area of the return by printing carefully all of the identification information requested. The discussion below explains, in order, each item requested in the identification section of the tax return. Refer to Illustration 1.3 to see how each item is completed. Name and Address: This area is for the taxpayer’s personal label. If the taxpayer did not receive a label, print the taxpayer’s first name and initial, followed by last name, and the taxpayer’s current mailing address including province or territory and postal code. If a change of address occurs after the return is filed and before the Notice of Assessment is received, the taxpayer should notify CRA of the move. This is important because the post office will not forward a refund cheque, but will instead return it to the CRA. There are three methods available to notify CRA of the change. If the taxpayer is registered with the “My Account” service the change of address can be made through the internet. If the taxpayer is not registered, notification should be in the form of a signed letter mailed to the taxation centre where the return was filed giving the taxpayer’s name, SIN, new address and date of move. The taxpayer may also phone the Individual Income Tax Enquires telephone service with the information. If an address other than the taxpayer’s residence is used for correspondence, the taxpayer should give both addresses and indicate which is to be used for tax purposes. Failure to include this information may create problems, especially if the two addresses are in different taxation districts.

Information about your residence Province or territory of residence on December 31: Enter the province or territory in which the taxpayer resided on: the last day of the year if he or she is still living and resident in Canada; the date of departure from Canada if he or she emigrated during the year; or the date of death if he or she died during the year. This information is important because it determines the province to which an individual must pay provincial income tax. Province or territory where you currently reside: If the taxpayer currently resides in a province or territory that is not the same as the one shown in the taxpayer’s mailing address, enter that information here.



Province or territory of self-employment: If the taxpayer was self-employed during the taxation year, enter the name of the province or territory where the business was located. Provincial taxes on business income are paid to that province or territory even though the individual’s residence may be in another. If the taxpayer’s business was located in more than one province or territory, all locations must be indicated because the taxes will have to be allocated. Residency change: If the taxpayer was a resident of Canada for less than an entire year (i.e., was an immigrant or emigrant), enter the date of entry or departure in the appropriate box.

Information about you Social insurance number: The taxpayer’s nine-digit social insurance number (SIN) is shown on the personalized label. However, if you are not using a personalized label, you must enter the SIN in the space indicated. A tax return without a SIN is incomplete; it may be rejected or incur a penalty. Taxpayers are required to provide their SINs to anyone who prepares information slips on their behalf, and must also provide them on their tax returns. A penalty of up to $100 may be assessed to those individuals who fail to obtain or provide a SIN. The importance of entering a correct SIN on a return cannot be overemphasized. It ensures that all Canada Pension Plan contributions are properly credited to the taxpayer’s account, along with any payment remitted with the return. Therefore, be sure that the number is correct and agrees with that on the taxpayer’s information slips. Although the number printed on a personalized label is usually correct, you should always double check to make sure. Date of birth: Enter the year, month, and day in which the taxpayer was born. This is of particular importance if the taxpayer is sixty-five years of age or older, or turned eighteen or seventy in the year. Language of correspondence: Indicate whether the taxpayer wants to receive correspondence in English or French. Marital status: This space is used to indicate whether the taxpayer was married, living common law, widowed, divorced, separated, or single on the last day of the taxation year. To be married or divorced means to be legally married or divorced. To be separated means to be living apart due to a breakdown of the relationship. Common-law status is discussed in detail in Chapter 4.

Information about your spouse or common-law partner Complete this section if the taxpayer was married or living common-law at the end of the year. His or her SIN: This should be shown on the personalized label. If you do not have a label, or if the number is not shown, or is incorrect, enter the correct SIN in the space provided.



His or her name: Enter the first name of the spouse or common-law partner. His or her net income: Enter the net income of the spouse or common-law partner. Amount of Universal Child Care Benefits included in his or her net income: Enter the amount of UCCB benefits included in the net income of the spouse of common-law partner. Amount of Universal Child Care Benefits repaid during the year: Enter the amount of UCCB benefits that were repaid during the year by a spouse or common-law partner. Self-employment box: Tick this box if the spouse or common-law partner was self-employed during the year. As mentioned on page 1.5, this may affect the taxpayer’s filing deadline. Date of death: When completing a return for someone who died during the year, enter the date of death in the area provided.

2009 General Income Tax and Benefit Guide, pages 9 to 10

Complete Q20 and Q21 before continuing to read.

Elections Canada Through 1997, voters’ lists were compiled by door-to-door enumerators. Now, however, Elections Canada maintains an automated database, called the National Register of Electors, which they update with information supplied by government agencies, including the CRA. The register is also used to create lists for provincial, municipal and school board elections. With certain exceptions, the CRA is prohibited from communicating taxpayer information without the consent of the taxpayer. Although the exceptions allow for the communication of information to a number of government departments or agencies, Elections Canada is not one of them. For this reason, there are two questions on page 1 of the T1 General asking whether the taxpayer is a Canadian citizen and if they are, asking for the taxpayer’s consent to provide his or her name, address and date of birth to Elections Canada (see Illustration 1.3). A “Yes” response to the second question authorizes the CRA to provide the specified information to Elections Canada for the purpose of updating the National Register of Electors. It also has the effect of adding a taxpayer’s name to the register, if he or she is an eligible elector. Therefore, Canadian citizens whose names are not currently on the register, and who want to vote in future elections, may have their names added by answering “Yes.” Taxpayers who are not Canadian citizens should not answer the second question. On the other hand, a “No” response to the second question does not have the effect of striking the taxpayer’s name off the National Register of Electors, nor will it affect the taxpayer’s right to vote. However, taxpayers who answer “No” are



responsible for making sure their names are on the correct voters’ list at election time, especially if they have moved in the meantime.


Goods and Services/Harmonized Sales Tax (GST/HST) Credit Application

In order to receive this credit a taxpayer must apply for it each year, by checking the “Yes” box in the application section (see Illustration 1.3). The GST/HST credit including amounts and who is eligible to receive them, is discussed in detail in Chapter 4 of this text.

Foreign Property As stated earlier, Canadian residents must report their income from all sources whether inside or outside Canada. In order to ensure that foreign income is reported, all taxpayers are required to answer the question: “Did you own or hold foreign property at any time in 2009 with a total cost of more than CAN$100,000.” If the answer is “yes,” the taxpayer must also complete a special form, T1135 and file it with CRA before April 30. In order to encourage compliance, the penalties for a false answer are quite severe. The government will use the information collected to make sure Canadian residents are reporting all the income they receive from foreign sources. This question appears at the top of page 2 of the T1 General (see the TTS Reference Book).


Complete Q22 and Q23.



Illustration 1.3



Summary In this chapter, you were introduced to the Canadian income tax system and learned how to complete the identification section of the T1 General.

You have learned that:

Income taxes are levied by the federal government and the governments of all ten provinces and three territories.

Federal taxation is governed by the Income Tax Act. The Canada Revenue Agency (CRA) collects tax on behalf of the federal

government and all the provinces and territories except Québec. Canadians are taxed on the basis of residency, not citizenship. Canadian residents are taxable on their world income for the whole year. The taxation year for individuals is the calendar year, January 1 to December 31 The due date for individual tax returns is April 30 of the following year. The due

date is extended to June 15 if the taxpayer or his/her spouse or common-law partner is self-employed.

Net income is the amount used to determine eligibility for many tax credits and social benefits.

Taxable income is the income on which tax is levied. Federal taxes for individuals are calculated on a tax return called the T1 Income

Tax and Benefit Return. Provincial/territorial taxes are calculated on special forms. In all provinces

except Québec, the resulting provincial/territorial taxes and credits are reported on the federal T1 return. In Québec, provincial taxes and credits are reported on a separate return, the TP-1, which is filed with the government of Québec.

The identification section of the T1 General is used to identify the taxpayer, and provide personal information that affects how tax is calculated.

The Elections Canada questions allow the CRA to provide selected personal information to update the National Register of Electors.

The foreign property question is designed to encourage compliance with the requirement to report income from foreign property.



Chapter 2 – Income from Employment

Introduction This chapter covers income from employment, and completion of page 2 of the T1 General.


Report the types of employment income (salaries, wages, etc.) that are shown on T4 slips;

Report the types of employment income that are not usually shown on T4 slips; Determine the amount of wage-loss replacement plan benefits to include in

employment income; Determine the amount of research grants to include in employment income; Complete a tax return through total income for an individual who has income

only from employment.

Glossary Before you read this chapter, review the following terms in the glossary: Research grant; and Wage-loss replacement plan.



Introduction Income from an office or employment is the type of income most commonly reported on the T1 return. In fact, employment income is reported on about 70% of all income tax returns filed. This chapter considers the nature of employment income, how it is reported by employers to employees, and how employees report it on their tax returns.

Employment Income “Employment income” on the T1 return includes income from an office as well as from ordinary employment. An office is any position to which an individual is elected by popular vote, or is

elected or appointed in a representative capacity (for instance, a judge, Member of Parliament or provincial legislative assembly, or corporation director).

Employment income is income from a source in which there is an employer-employee relationship; it does not include income from a taxpayer’s own business, that is, from self-employment.

The question of whether a person is employed or self-employed depends partly on the degree of control exercised by the parties involved. Employees are generally controlled and directed by their employers in terms of the work to be done, as well as when and where and how it is to be done. Self-employed persons, on the other hand, are free to determine the products and services they will provide, can select the customers to be approached, the hours to be worked, the price to be charged, and can hire others to actually do the work. Another distinction is that employees usually receive wages, salaries or tips, as well as other benefits such as vacation pay, sick days, or health care and pension benefits. Self-employed persons, on the other hand, generally invoice their customers for the work done or products delivered, and receive no additional payments or benefits. Finally, most employees will receive a T4 slip showing the income earned, while self-employed persons often receive no slip at all.


Information Slips Most of the sources from which a taxpayer receives income are required to issue information slips to the taxpayer. These usually indicate the amount and type of income paid and, if applicable, any tax or other amounts deducted at source. They may also indicate deductions or credits to which the taxpayer is entitled. The preparation of tax returns is made easier through the use of these slips. The TTS Reference Book provides samples of the more common information slips, along with detailed instructions for their use.

32 Chapter 2 – Income From Employment


T4 Slips Every year, by the last day of February, employers must provide employees with a T4 Statement of Remuneration Paid. This information slip shows the gross employment earnings and deductions for the preceding year. It also provides detailed information about the types of income and benefits received, along with other tax-related information. A few boxes are pre-numbered, and the rest are inserted as needed in the “Other Information” area at the bottom of the slip.

T4 slip

Box 14 includes all taxable remuneration received from the employer, and is the amount to report on Line 101 (see Illustration 2.1). The most common amounts in Box 14 are: salary or wages; commissions; bonuses; vacation pay; and taxable allowances and benefits. corporate director’s fees; and gratuities or honoraria (voluntary payments in recognition of services).

Commissions If any part of the amount in Box 14 represents commissions, that part is shown separately in Box 42. Since Box 42 is not a pre-numbered box, it is shown in the “Other Information” area at the bottom. This amount is entered on Line 102 of the T1 General (see Illustration 2.1). Note that commissions shown in Box 42 are also included in Box 14. Therefore, these amounts should not be added into total income (this would involve counting the income twice). Instead, this entry provides support for expenses that may be claimed by persons paid by commission (discussed briefly in Chapter 3, and in more detail in H&R Block— Employment Expenses).



Taxable Allowances and Benefits The amount in Box 14 of the T4 slip includes the value of taxable allowances and benefits provided by the employer. Such taxable allowances and benefits are reported separately in the “Other Information” section as follows: free or subsidized housing, meals, or board and lodging (Box 30); allowances for travel in a “prescribed zone,” i.e., specified areas of northern

Canada (Boxes 32 and 33); personal use of an employer’s automobile (Box 34);



interest-free or low-interest loans (Box 36); stock option benefits (Box 38 ); and other taxable allowances and benefits, such as employer-paid life insurance,

provincial health care premiums, vacation trips, etc. (Box 40). The T4 slip shown in Illustration 2.1 shows a taxable benefit of $436 in Box 40. It is not possible to determine from the slip what the benefit represents. Therefore, taxpayers who have questions about amounts reported on T4 slips must contact their employers; they are the ones responsible for explaining the amounts reported. Taxable allowances and benefits are already included in Box 14 and are ordinarily not entered anywhere on the return.

Illustration 2.1

Non-Taxable Allowances and Benefits Some allowances and benefits received by employees are non-taxable. The following non-taxable amounts are reported on the T4 slip, for information purposes only: special work site allowances or benefits (Box 31); municipal officer’s expense allowances (Box 70); and. security options benefits (code 53). (Tax may be deferred to the year of

disposition.)



Non-taxable benefits are generally never entered on the tax return.

Emergency Volunteers Emergency volunteers who receive payment for their work as ambulance technicians, fire fighters, or for search, rescue, or other emergency work are not subject to tax on the first $1,000 of the income they receive from a government, municipality or other public authority. The public authority making the payment issues a T4 slip only for the amount paid that is above the $1,000 threshold. Therefore, the taxable portion of the allowance is the amount reported in Box 14.

Deductions and Other Amounts Shown on a T4 Slip Employers must report on T4 information slips certain amounts withheld from their employees’ pay. These include amounts deducted for: Canada or Québec Pension Plan contributions (Box 16 or 17, respectively); employment insurance premiums (Box 18); registered pension plan contributions (Box 20); income tax (Box 22); union dues (Box 44); and charitable donations (Box 46). Employers must also indicate on the T4 if the employee is entitled to claim the following tax deductions related to certain allowances or benefits received: employee home relocation loan deduction (Box 37); security options deduction (Boxes 39 and 41); and WCB benefits repaid (Box 77) Employers are also required to report an employee’s pension adjustment, if any, in Box 52. All of these amounts are discussed in upcoming chapters.

Summarizing Information from T4 Slips If a taxpayer has more than one T4 slip, information from them should be added and the totals carried to the appropriate lines on the T1 (see Illustration 2.2).




Illustration 2.2



Other Employment Income Most employment income is recorded on a T4 slip and entered on Line 101. However, employment income that is not recorded on a T4 slip must be entered on Line 104. This includes employment income that is shown on other types of slips, such as a T4A or T4PS, as well as income that is not shown on any slip at all. Employment income on a T4A is recorded in Box 28, and the type of payment is indicated in the footnotes area. It is important to read the footnote because not all income shown in Box 28 is employment income. If the income reported in Box 28 is not employment income, it is reported on Line 130 instead. All items reported on Line 104 should be identified. If more than one item is reported, a supporting worksheet should be prepared. Several of the more common Line 104 items are discussed below.

T4A slip, T4PS slip

Casual Labour In most cases, casual labour is reported on a T4 slip, because EI premiums must be withheld beginning with the first dollar of insurable earnings. However, if an employer was not required to deduct EI premiums because the employment was not insurable, and the remuneration was less than $500, a T4 does not have to be issued. However, even if no T4 slip is issued, such amounts must still be included in income.

Odd Jobs Many individuals receive payments for odd jobs, such as snow shovelling or baby-sitting. Like casual labour, income from such activities must be reported even though no information slip is issued for the amounts. However, you should carefully consider the nature of such income before reporting the payments received. For example, one woman might care for several neighbourhood children in her home all day on a regular basis; she is self-employed and the income should be reported on Line 135. A second woman might care for the children of another family in their home all day on a regular basis; she is an employee, should receive a T4 and report the income on Line 101. A third woman might care for a friend’s child one or two evenings per month so that the friend can go to a movie; if she is paid for her efforts, she is engaged in occasional employment and should report the total of such payments for the year on Line 104.

Tips and Gratuities Waiters, waitresses, taxi drivers, and many other workers in the service industry receive tips as a regular part of their income. In some cases, tips are reported to employers and included on the employee’s T4 slip. Usually, however, employees must keep track of their own tip income and report the amount on Line 104. Taxpayers who receive tips must report the full amount received as tips are fully taxable. According to the CRA, waiters and waitresses typically earn anywhere from 100% to 400% of their wages in tips, depending on the type of establishment. If tips



are not reported, the CRA may exercise its own judgement as to the amount received, and may assess penalties for failure to report income.

Wage-Loss Replacement Plan Benefits Various kinds of sickness, accident, disability, and maternity plans exist to compensate employees for lost income when they are sick, injured, disabled, or pregnant. These income-maintenance insurance plans are often referred to by CRA as “wage-loss replacement plans.” The taxation of income from such plans depends on who paid the premiums for the plan: If the employer paid all the premiums (i.e., the employee does not, and has

never, contributed to the plan), a T4A slip is issued, and the amount to be included in income is equal to the amount received.

If the employee paid all the premiums (i.e., the employer does not, and has never, contributed to the plan), none of the benefits received are taxable, and a T4A slip is not ordinarily issued.

If both the employer and employee contributed to the plan, the payment shown on the T4A slip should be reduced by all employee contributions made to the plan that have not already been used on a previous year’s return to reduce income received from the plan.

Therefore, the first step in determining the taxability of wage-loss replacement plan benefits is to find out who paid the premiums. If the employee paid them all, none of the benefits are included in income; if the employer paid them all, all the benefits are included in income; if both the employer and employee paid the premiums, a calculation is required to determine the amount to be included in income. To carry out the calculation, it is necessary to determine the employee’s unused premium contributions, which is the total value of all the premiums paid, less any prior year benefits received from the plan since the last time benefits were included in income. If this figure is less than the amount shown on the T4A, enter the difference on

Line 104. If this figure is more than the amount shown on the T4A, do not enter any

amount on Line 104. A statement showing the calculation should be prepared.

2009 General Income Tax and Benefit Guide, page 12 to 13



Illustration 2.3

Besides his wages of $34,000, Franklin has a T4A showing $1,000 in wage-loss replacement plan benefits. He made yearly contributions of $200 for each of the last three years. His employer also contributed to the plan. This is the first time Franklin has received benefits from the plan. Below is Franklin’s T4A, followed by the calculation and the entry he will make on his T1.

Wage-loss replacement plan benefits received (from T4A) $1,000 Less: employee contributions for last three years (3 x $200) Amount to include in income on Line 104 $400

$600

Research Grants A research grant is a sum of money that enables the recipient to carry out a research project. It may be paid by a college or university, by a corporation, or even by the recipient’s employer (in the latter case any part that represents salary is reported on a T4 slip). The grant may include amounts for remuneration, personal or living expenses, cost of equipment, assistant’s fees, cost of travel, and other expenses necessary to conduct the research. The full amount of a research grant is usually reported in Box 28 of a T4A slip, but the recipient may deduct certain expenses and include only the net amount in income. Allowable expenses include those necessary to carry out the research, such as equipment, fees, amounts paid to an assistant, and travel expenses (including transportation, meals and lodging). A list of the expenses should be attached to the return.



Note that the total expenses deducted cannot be more than the amount of the grant. In addition, the following expenses are not deductible when calculating the net taxable amount: personal or living expenses, other than traveling expenses; expenses for which the recipient was reimbursed (if the reimbursement is not

shown in Box 28); and expenses deductible elsewhere on the return.


Illustration 2.4

Leland has a T4A showing $1,000 in Box 28. This amount represents a grant he received from C.M.H. to carry out a research project. In conducting the research, Leland incurred expenses of $300 for equipment. Below is Leland’s T4A, followed by the calculation and the entry he will make on his T1.

Research grant (from T4A) $1,000 Less: Equipment expenses Net research grant (Line 104) $700

300



Supplementary Unemployment Benefit Plans Taxable benefits from these registered plans, also known as guaranteed annual wage plans, are reported in Box 28 of a T4A slip and identified in the footnote area. Enter the reported amount on Line 104 of the return.

Veteran’s Benefits Amounts received on account of an earnings loss benefit, supplementary retirement benefit or permanent impairment allowance payable under the Canadian Forces Members and Veterans Compensation Act are reported in Box 28 of a T4A slip. These are identified by code 27 in Box 38. Enter the reported amount on Line 104 of the return.

Employees’ Profit Sharing Plan A profit sharing plan is an arrangement whereby an employer pays the employees a part of the employer’s profits. Such amounts are reported in Box 35 of a T4PS, are treated as employment income, and should be entered on Line 104 of the T1.

Royalties from a Work or Invention Taxpayers can receive royalties from something they produced or invented themselves, or from assets they simply own or to which they have the rights. Both types of royalties are reported in Box 17 of a T5 slip. If the royalties are from a taxpayer’s own work or invention, report the income on Line 104. Otherwise, the income is reported on Line 121, as discussed in Chapter 6.

Total Income As mentioned in Chapter 1, total income is the sum of reportable income from all sources, and the total is entered on Line 150. In this chapter, we have discussed only employment income, the most commonly reported source of income. You will encounter many other kinds of income in subsequent chapters of this book. Regardless of the number of entries, however, total income is simply the sum of all the sources of income entered in this section, and is totalled at Line 150 of the tax return.

Complete Q8 to Q12.



Summary In this chapter, you learned how to report various types of employment income, and how to complete a tax return through Line 150.


Employment income shown in Box 14 of a T4 slip is reported on Line 101 of the tax return.

Employment income shown in Box 14 of the T4 slip includes all taxable forms of remuneration from the employer, including taxable allowances and benefits.

All employment income must be reported, even if it is not shown on a T4 slip. All employment income not shown on a T4 slip is reported on Line 104 of the tax

return. Commission income shown in Box 42 of a T4 slip is reported on Line 102 of the

tax return. Income from casual labour and odd jobs is considered employment income, and

the full amount received must be reported on the tax return. Tips and gratuities received in the course of employment are considered

employment income, and the full amount received must be reported on the tax return.

Wage-loss replacement plan benefits are considered employment income, but the amount to be reported depends on who paid the premiums: ▪ If the premiums were fully paid by the employer, the benefits are fully

taxable and the full amount must be reported. ▪ If the premiums were fully paid by the employee, the benefits are completely

non-taxable, and no amount is reported on the return. ▪ If the premiums are paid partly by the employer and partly by the employee,

the taxable amount is the amount by which the benefit received exceeds all the premiums paid by the employee (not including premiums used to reduce income from the plan in a prior year).

Research grants are considered taxable income. The amount to be reported is the gross amount received, less allowable expenses. If expenses exceed the amount received, report zero (never a negative amount).

Allowable research expenses include the following (if required to carry out the research): cost of equipment, amounts paid to an assistant, and travel expenses.

Other employment income includes supplementary unemployment benefit plans, employees’ profit sharing plan benefits, veteran’s benefits, and royalties from an individual’s own work or invention.

Total income is the sum of all the reportable income for tax purposes, as itemized on page 2 of the tax return.



Chapter 3 – Employment Deductions and Credits

Introduction Once a taxpayer’s total income is determined, net and taxable income must be calculated. As noted in the first chapter, many taxpayers are able to reduce their total income by deducting a variety of amounts from it; this determines their net income. Net income is then reduced by specified deductions to determine taxable income. Many taxpayers may also claim a variety of credits; these are used to reduce tax, rather than to reduce income. This chapter describes the most common employment deductions and credits. The deductions are entered on the income tax return under “Net income” or “Taxable income,” and the credits under “Non-refundable tax credits” on Schedule 1.


Claim the deduction for registered pension plan contributions for the current year;

Claim union, professional or similar dues; Claim eligible moving expenses for qualifying taxpayers who move in order to

begin work in a new location; Claim repayments of employment income where applicable; Claim the deductible amount for qualifying employee home relocation loan and

stock option benefits; Claim the Canadian Forces personnel and police deduction; Complete a tax return to calculate Net income and Taxable income;

44 Chapter 3 – Employment Deductions & Credits


Calculate an employee’s required Canada Pension Plan contribution and any overpayment, if applicable;

Calculate an employee’s required employment insurance premium and any overpayment, if applicable; and

Claim the Canada Employment Credit.

Glossary Before you read this chapter, review the following terms in the glossary: Canada Pension Plan; Credit; Deduction; Stock option; and Taxable income.



Registered Pension Plan Contributions A pension plan is an arrangement whereby an employer sets aside funds to provide pension benefits to employees when they retire. The benefits an employee receives can be based on a variety of factors, such as length of service and level of remuneration; and the funds set aside can come from the employer, employee, or both. A registered pension plan (RPP) is one that has been registered with the CRA for purposes of the Income Tax Act. Most employees in Canada who are members of a pension plan are enrolled in defined benefit pension plans. Benefits from such plans are not based on the amount of money in the plan, but are “defined” by a formula based on factors such as years of pensionable service, salary level, etc. The other kind of pension plan is a money purchase contribution plan. Such a plan provides participants with whatever level of pension benefits the property in the plan will buy at the time of retirement. Contributions withheld by an employer are shown in Box 20 of an employee’s T4 slip and the deductible portion may be deducted on Line 207. If any portion of the contributions in Box 20 is in respect of past service for years prior to 1990, these amounts will be shown in Box 74 or 75. The registration number of the plan is shown in Box 50. A number in Box 50 and a “nil” entry in Box 20 usually indicate that the plan is fully funded by the employer and that the employee does not contribute. If a taxpayer is a member of a pension plan, a pension adjustment (PA) is shown in Box 52 of the T4 slip. The PA shows the value of pension benefits accrued in the plan during the taxation year. The PA is entered on Line 206, but is not included in income nor deducted from it. PAs are discussed in Chapter 9.


Fully Deductible Contributions If there is no amount in Box 74 or Box 75, all the contributions in Box 20 are for current service, or for past service after 1989, and are fully deductible.

Pre-1990 Past Service Contributions Contributions for past service prior to 1990 are subject to complex rules that may limit the amount that can be contributed, and the amount that can be deducted from income. The CRA’s RRSPs and Other Registered Plans for Retirement tax guide provides details for those who are interested.




Annual Union, Professional or Like Dues Annual trade union or public servants’ association dues paid by employed taxpayers are deductible at Line 212 of the T1 return. Deductible union dues include charges for the normal operating expenses of the union, but not initiation fees, special assessments, or any other charges. Also not deductible under this provision are insurance premiums and RPP contributions paid as part of union dues, although the RPP contributions may be deducted at Line 207 instead. If paid through payroll deduction, union dues are usually shown on the employee’s T4 in Box 44. If they are not shown on the T4, the taxpayer must have an official receipt; it should not be attached to the return, but should be retained by the taxpayer in case the CRA wishes to see it. Annual professional membership dues, as well as professional or malpractice liability insurance premiums are also deductible on Line 212, provided they meet all the following conditions: the payment is required in order for the person to retain professional status; the professional status is recognized by Canadian, provincial, or foreign statute;

and the person’s position or job is reasonably related to the professional status (note

that it is not necessary that the professional status be a job requirement, only that it be reasonably related to the job).

Taxpayers can also deduct dues paid to a professions board, or to a parity or advisory committee, if the payments are required under provincial law. A taxpayer claiming a deduction for professional dues must have a receipt. It should not be attached to the return, but should be retained in case the CRA wishes to see it.



Moving Expenses Employees who move in order to commence work at a new location (even if it is for the same employer) may be eligible to deduct certain moving expenses on Line 219 of their tax returns. Moving expenses may also be deducted by self-employed persons who move to start a business at a new location or by students who move in order to study full-time at a university, college or other educational institution providing courses at the post-secondary level. In this section we discuss moving expenses incurred by those who move in order to begin work at a new location. The special rules that apply to students moving to attend post-secondary schools are discussed in Chapter 11.



2009 General Income Tax and Benefit Guide, pages 25

Distance Requirement In order for moving expenses to be deductible, the new residence must be at least forty kilometres closer to the new place of employment than the old residence. The distance measurement is made using the shortest usual public travel route, rather than by a straight-line measurement.

Net Earnings Limit Moving expenses are deductible only from a taxpayer’s net earnings at the new location. This means that someone who moves late in the year, and therefore has very little earned income at the new location, may be limited in the amount that can be deducted. However, eligible moving expenses that cannot be deducted in the year of the move may be carried forward and claimed against net earnings from the new location in a subsequent year. The full amount though must be reported in the year that the expenses for the move occurred and any unused amounts carried forward.

Purpose of Move In order for moving expenses to be deductible, the move must be made for the purpose of commencing work at a new location. However, under the CRA’s current administrative policy, it is not necessary to already have a job at the new location before moving. This means that expenses incurred to move to a new location in order to look for work would qualify. However, because of the net earnings limit, it follows that if the person does not actually find work, the expenses would not be deductible.

Other Rules There is no time limit regarding the date by which someone must move after beginning work at a new location, so long as the move is the result of the change in work locations. Thus taxpayers who delay moving for a reasonable length of time (e.g., until their homes sell, or their children get out of school for the summer), may nonetheless claim moving expenses. However, it is the CRA’s opinion that “the greater the length of time that separates an employee’s move from the change in work locations the less likely it is that the employee’s move arises as result of that change.” In some cases, moving expenses may be incurred after the year of the move (e.g., if a taxpayer’s house does not sell immediately, the real estate commissions and other selling costs may not be incurred until the following year). Such expenses may be claimed in the year they are actually paid. A person who moves more than once in a year and has eligible moving expenses for each move, is in each case limited to net income earned at the new location. If a husband and wife both move to take new jobs or go into new businesses, the expenses of the move may be split between them.



If an employer transfers an employee to a new location and pays part or all of the moving expenses, those same expenses may not be deducted by the employee. Only eligible moving expenses in excess of those paid or payable by the employer or for which the taxpayer is not reimbursed are deductible. The taxpayer should provide a letter from the new employer and if applicable, from the new employer of the taxpayer’s spouse or common-law partner confirming the date of the move and whether or not if any of the expenses were reimbursed. Generally, moving expenses must be incurred within Canada in order to be deductible. However, Canadian residents living outside Canada may be able to claim moving expenses as if the move had occurred in Canada.


Deductible Moving Expenses Deductible moving expenses are those listed in the Income Tax Act, and are limited to the following: the cost of moving household effects, including packing, hauling, in-transit

storage, and insurance costs; transportation costs to the new residence for the taxpayer and his or her family

including amounts for travel, meals, and lodging en route; the cost of temporary lodging and meals for up to 15 days near the former

residence and/or the new residence; the cost of cancelling a lease for the old residence, not including any rent paid

while the taxpayer lived there; the cost of changing addresses on legal documents, replacing automobile permits

and licenses, and utility hook-ups and disconnections; up to $5,000 of the amount incurred for interest, property taxes, insurance

premiums, heating and utilities required to maintain the former residence after the move, provided it was not being rented or lived in by a household member and reasonable efforts were made to sell it;

selling costs of the old residence, including real estate commissions, legal or notarial fees, advertising, and mortgage penalty if a mortgage is paid off before maturity; and

legal fees connected with buying a new home and any taxes paid to register or transfer title to the new residence, but only if the taxpayer or his or her spouse sold the old residence as a result of the move. This deduction is not available to taxpayers acquiring a first residence. “Taxes paid to register or transfer title” do not include the GST/ HST payable on newly built residences.



Non-Deductible Moving Expenses The items listed below are not deductible as moving expenses: pre-move expenses from the old location to the new location for job-hunting,

house-hunting, or any other purpose; expenses incurred to make the former residence more saleable; Canada Post mail-forwarding costs; costs for arranging financing for the new residence; and any loss on the sale of the old residence.


Claiming the Deduction Form T1-M Moving Expenses Deduction, shown in Illustrations 3.2 and 3.3, is used to calculate the moving expense deduction. On page 1, the taxpayer’s name and SIN are entered, followed by details of the move and calculation of distance. On page 2, eligible moving expenses are entered on the appropriate lines, along with other information as requested. Most of the entries are straightforward; however, special note should be made of the following: Under travel costs, taxpayers who use public transportation to travel to the new

residence may deduct the cost of the transportation (e.g., plane fare, train fare). Taxpayer’s who use their own automobiles may deduct their vehicle expenses, using either the simplified or detailed method. ▪ Under the simplified method, taxpayers may deduct a flat rate per/kilometre,

based on the province in which the travel began. These rates are shown in a table in the TTS Reference Book.

▪ Under the detailed method, taxpayers can claim the actual cost of operating the vehicle during the move. This requires a complete record of all vehicle expenses for the year, including operating expenses (fuel, oil, tires, license fees, insurance, maintenance and repairs) and ownership expenses (depreciation, provincial tax, and finance charges). The moving expense claim is then calculated as a percentage of the total of all the expenses, based on the distance of the move compared to the total distance driven during the year. For example, if the automobile was driven 20,000 km in the year, the move was 2,000 km, and the total operating and ownership expenses were $10,000, the amount claimed as a moving expense would be $1,000, calculated as (2,000/20,000km) x $10,000.



Meals consumed during the move, or while living in temporary accommodations near the old or new residence (maximum 15 days), can be claimed using the simplified or detailed method. ▪ Under the simplified method, taxpayers may claim a flat rate of $17 per meal

per person to a maximum of $51 per person per day. ▪ Under the detailed method, taxpayers may claim what they actually spent on

meals as long as the amount is reasonable. Taxpayers are not committed to using the same method (detailed or simplified)

for both meals and vehicle expenses. If they wish, they can use one method for claiming meals and another for claiming vehicle expenses.

Under incidental expenses, taxpayers may claim the cost of address changes on legal documents, replacing automobile permits and driving licenses, and utility hook-ups and disconnections.

Taxpayers may claim the cost of purchasing a new residence only if the old residence was sold as a result of the move.

Any non-taxable reimbursement or allowance received for any eligible moving expenses must be deducted from the total expenses claimed.

Net moving expenses may be deducted to the extent of the taxpayer’s net income from employment or self-employment at the new location. Any amount not deductible in the current year may be carried forward to a subsequent year. To calculate net income from employment at the new location, subtract the following amounts from the total earnings at the new location: any RPP contributions applicable to that employment; any union, professional, or like dues applicable to that employment; and “Other employment expenses” (Line 229) attributable to that employment. If a taxpayer worked for the same employer before and after the move, and all the income is reported on the same T4, be sure to divide the income accordingly. If the moving expenses exceed the net income from employment, write the difference at the bottom of the form with a notation “Carryover to 20___” (the next year). To claim the amount the following year, do not complete another T1-M; simply indicate at Line 219 that it is a carryover.



Illustration 3.1

On June 28, Andy Noble left Peterborough, Ontario, with his wife, Sylvia, and their two children to move to Saskatoon, Saskatchewan, in order to start a new job. Andy’s old residence was 2,926 kilometres from his new job. His new home is only 13 kilometres from work. Andy began working at his new job on July 5. Andy and Sylvia sold their house in Peterborough on June 20. They moved that day to a motel in Peterborough where they spent eight nights at $90 per night (including taxes). Acme Moving Company moved their household belongings for $6,000. Andy and his family drove to Saskatoon (2,932 kilometres) over a 4-day period, and paid $342 (taxes included) for motels for 3 nights during the trip. They spent their first seven nights in Saskatoon at a motel at $85 per night (taxes included) before moving into their new home. Andy did not keep receipts for meals and does not have a record of his automobile expenses. Andy sold his home in Peterborough for $162,000; the real estate commission was $9,600 and legal fees were $500. His new residence in Saskatoon cost $175,000; legal fees related to purchase were $625, and registration and title transfer taxes came to $2,310. Andy’s qualifying incidental expenses (for utility hook-ups) were $120. Andy’s net income from employment at the new location was: $15,350 – $1,200 (RPP) = $14,150. His new employer reimbursed him for $8,000 of his moving expenses. Andy’s T1-M is shown in Illustrations 3.2 and 3.3.



Illustration 3.2



Illustration 3.3




Other Employment Expenses

Employees who meet certain strict criteria may deduct specified expenses incurred to earn employment income on Line 229. A set of general regulations applies to all employees, and special rules apply to employees in specific occupations such as commission sales, transportation, forestry, music, art, and religious ministry. Under the general regulations, employees may deduct eligible employment expenses only if they meet all of the following conditions: their contract of employment requires them to pay the expenses; a reimbursement has not and will not be received for the expenses; and they have Form T2200 Declaration of Conditions of Employment that has been

signed and certified by the employer. Expenses which may be deductible include the cost of supplies, travel expenses, automobile expenses, and certain expenses related to maintaining an office or work space at home. The treatment of employment expenses is the subject of H&R Block — Employment Expenses, which you may be taking as an optional segment of this course. If not, you may be interested in studying the CRA’s Employment Expenses tax guide. Although you should be aware of the fact that certain employees may be able to deduct employment expenses, you should also know that the vast majority of employees are not able to do so. Only those individuals who meet the specific conditions set out in the Income Tax Act may deduct employment expenses. For everyone else, the only compensation available through the income tax system is the Canada Employment Tax Credit which was introduced for the 2006 taxation year. This non-refundable credit is discussed later in this chapter.

Repayment of Employment Income Occasionally, taxpayers may be required to repay certain types of employment income that they included in income on a current year or prior year return. For example, an employee may have to repay wage loss replacement plan benefits as the result of a subsequent Workers’ Compensation Board award. In such cases, the amount of the repayment can be deducted at Line 229 of the tax return in the year of repayment.





Employee Home Relocation Loan Deduction Employers sometimes provide their employees with low-interest or interest-free loans to help them buy homes when they are required to move because of a job transfer. This usually results in a taxable benefit to the employee, which is reported in Boxes 14 and 36. Under certain circumstances, the taxable benefit related to the first $25,000 of the loan may be deductible for the first five years of the loan. If so, the employer will state the deductible amount in Box 37, and this amount can be deducted at Line 248.

Canadian Forces Personnel and Police Deduction Members of the Canadian Forces or a police force serving on a deployed operational mission that is assessed for risk allowance 3 or higher (as determined by the Department of National Defence) or a prescribed mission may deduct the lesser of: the employment income earned while serving on the mission and the maximum rate of pay earned by a non-commissioned member of the

Canadian Forces (approximately $6,000 per month) to the extent that the employment income is included in computing the taxpayer's income for the year.

Selected Canadian Forces missions assessed for risk allowance 2 (as determined by the Department of National Defence) will be prescribed missions. The following missions are prescribed: Operation Palladium (Bosnia-Herzegovina); Operation Halo (Haiti); Operation Danaca (Middle East - Golan Heights); Operation Calumet (Middle East - Sinai); Operation Jade (Middle East - Jerusalem and Damascus); Operation Iraqi Freedom (Kuwait); and Operation Solitude (Senegal). Operation Altair; Operation Hamlet (Haiti); Operation Structure (Sri Lanka); Operation Habitation (Haiti); Operation Augural (Sudan - Kartoum); Operation Bronze (Bosnia-Herzegovina NATO Stabilization Force); Operation Boreas (Bosnia-Herzegovina – EU Force);



Operation Safair (Sudan – Kartoum); Operation Gladius (Golan Heights); Operation Augural (Ethiopia – Addis Abbaba); and United Nations Mission in the Sudan. This deduction also applies to income earned by members of a police force serving on a prescribed mission that is not conducted by the Canadian Forces and, thus, may not have a current DND risk assessment. The amount of the deduction is shown in box 43 of the employee’s T4 slip and is claimed on line 244.

Security Options Deductions Some companies offer their employees an option to buy their shares at a fixed price, usually the trading price of the shares on a specified date. Ordinarily the employee is given a time period during which the option can be exercised, and during which the fair market value of the shares will usually fluctuate. If the employee decides to exercise the option and the cost is less than the fair market value at that time, the difference is a taxable benefit, which is shown in Box 38 and included in Box 14. Most stock options are eligible for a special deduction of one half the taxable benefit. If so, the amount of the deduction will be shown in Box 39 or 41, and can be deducted at Line 249. However, taxpayers may elect to defer the tax payable on the exercise of employee stock options to the year in which the shares are sold. If an employee makes this election, the deferred benefit is not included in Box 14, but is reported in Box 53 instead. In this case, the employee must complete Form T1212 Statement of Deferred Security Option Benefits and file it with the tax return each year until the shares are sold. When the shares are sold, the amount of the benefit is included in Box 14 of the employee’s T4 slip and is therefore included in the amount on Line 101. If the shares are eligible for the security options deduction, one-half of the benefit can be claimed on Line 249 in the same year the benefit is reported. Illustration 3.4 follows on next page.



Illustration 3.4

Sophie is an executive with OLBT Inc., a public Canadian Corporation. A few years ago, OLBT granted her an option to purchase 1,000 shares in the company at $10.25 per share. Sophie exercised her option in January, when the price was $15.25 per share. The shares are eligible for the security options deduction. The taxable benefit is calculated as the difference between the option price and the fair market value of the shares on the date of exercise ($15,250 – $10,250 = $5,000). If Sophie does not elect to defer the benefit, her T4 slip will show $5,000 in Box 38, and this amount will be included in Box 14. Her T4 will also show an amount of $2,500 in Box 39 or 41, which indicates that one half of the $5,000 benefit is eligible for the security options deduction. This amount can be deducted on Line 249 of her return. If Sophie elects to defer the benefit until the year in which she actually sells the shares, the deferred benefit will not be included in Box 14, but will be reported in Box 53 instead. In this case, she must file form T1212 Statement of deferred Security Option Benefits with her tax return as shown below.





Calculation of Net Income and Taxable Income The calculation of total income was discussed in Chapter 2. The next step in preparing a tax return is to calculate net income and taxable income. To determine net income, add up the deductions claimed on Lines 207 through 232, and subtract them from total income. Then subtract any social benefits repayment calculated at Line 235 (discussed in Chapters 7 and 12). The result, shown on Line 236, is net income. This amount is used to determine eligibility for various tax credits and social benefits. To calculate taxable income, deduct the amounts on Lines 244 through 256 from net income. The result, shown at Line 260, is taxable income. This is the amount on which tax is levied. At this point you have studied several deductions that enter into the calculation of net income (i.e., Lines 207, 212, 219 and 229) and three deductions (Lines 244, 248 and 249) that enter into the calculation of taxable income. You will study many others in subsequent chapters of this book. However, regardless of the number of entries, the basic calculation remains the same.


Canada Pension Plan Contributions The Canada Pension Plan (CPP) is an earnings-related social insurance program designed to protect contributors and their families against loss of income due to retirement, disability, or death. The Canada Pension Plan is in force throughout Canada except in Québec, where the similar Québec Pension Plan (QPP) is in place. Here we focus on the CPP; the QPP is covered in the Québec supplement. The CPP is financed by contributions from employees, employers, and self-employed taxpayers. Most employed and self-employed persons in Canada who are between 18 and 70 years of age are required to contribute to the CPP. A taxpayer’s earnings up to a maximum amount are called “pensionable earnings.” The pensionable earnings are reduced by a “basic exemption,” and the difference is the “earnings subject to contribution.” For 2009, employees were required to contribute 4.95% of earnings subject to contribution. Employers were required to contribute another 4.95%, so that the total contributed to the plan on behalf of each employee was 9.9%.



For 2009, the following limits apply: maximum pensionable earnings: $46,300; basic exemption: $3,500; maximum earnings subject to contribution: $42,800 (calculated as $46,300 –

$3,500); and maximum required contribution: $2,118.60 (calculated as $42,800 x 4.95%).

Employer Withholding An employee’s CPP contributions are ordinarily made entirely through deductions from wages or salary. Each employer is required to withhold the correct amount of contributions from an employee’s income according to tables published by the CRA. The employer is also responsible for making the necessary entries on the employee’s T4 to show: in Box 16, the amount withheld for CPP contributions; in Box 26, the amount of pensionable earnings for CPP purposes if some (but not

all) of the earnings shown in Box 14 are pensionable; and in Box 28, a tick in the CPP/QPP section if none of the employee’s earnings

shown in Box 14 are pensionable. This means that pensionable earnings are the same as the total earnings in Box 14 (or the maximum for the year whichever is less) unless an entry is made in Box 26 or the CPP/QPP section of Box 28. This occurs only when some or all of the employee’s earnings are exempt from CPP. Exempt earnings include amounts such as the following: casual employment, tips, and other specified types of employment not subject to

CPP; wages or salaries paid to an employee:

▪ before and during the month in which the employee turned eighteen; ▪ after the month in which the employee turned seventy; or ▪ during the month(s) in which the employee received a CPP disability or

retirement pension. In summary, the entries on the T4 slip are made as follows: If all of the employee’s earnings are pensionable, then Box 26 is blank, and

pensionable earnings are the same as the gross earnings shown in Box 14 (or the maximum for the year, whichever is less). Contributions are shown in Box 16.

If some of the employee’s earnings are pensionable and some are exempt, then Box 14 shows the gross earnings and Box 26 shows the pensionable earnings. Contributions are shown in Box 16.



If none of the employee’s earnings are pensionable, then a tick is placed in the CPP/QPP portion of Box 28, and Boxes 16 and 26 are blank. In this case, the pensionable earnings are zero. An example of this is an employee who is under 18 throughout the year, since all earnings before the age of 18 are exempt. Another example is an employee who received a CPP pension while working. It is important, therefore, for employees to inform employers whenever such conditions exist so that deductions will be correct and the T4 properly prepared.


Underpayments, Overpayments, and Refunds The required CPP contribution is calculated by subtracting the basic exemption ($3,500) from the total pensionable earnings (from Box 14 or 26 of all T4 slips), and multiplying the result (maximum $42,800) by 4.95%. Usually, this required contribution is equal to the amount shown in Box 16, and is the amount claimed on Line 308 of Schedule 1. Occasionally, a person’s required contribution may be more or less than the amount actually withheld. This results in an overpayment or underpayment of CPP. An underpayment may occur when a taxpayer works for more than one employer and total earnings are less than the maximum pensionable earnings. This is because the $3,500 basic exemption is factored into the tax tables used by each employer, so the basic exemption ends up being applied more than once. Fortunately, no adjustment is made on the tax return for an underpayment. The employee simply claims on Line 308 the actual contributions made, and need not make up the difference. An overpayment usually occurs when a person works for more than one employer in the year and the total earnings exceed the maximum pensionable earnings. Because each employer deducts contributions independently, contributions continue to be deducted by the second employer even after the person’s yearly maximum with one employer has been reached. Unlike underpayments, overpayments are reported on the tax return and may be refunded to the taxpayer. This is accomplished by claiming the excess amount as a refundable credit on Line 448 of the T1. When there is an overpayment, the amount claimed on Line 308 of Schedule 1 is limited to the required contribution (i.e., the amount actually contributed less the overpayment to be refunded).

CPP Overpayments The CRA Form T2204, Calculation of Employee Overpayment of 2009 Canada Pension Plan Contributions and 2009 Employment Insurance Premiums (reproduced in Illustration 3.6) can be used to compute a taxpayer’s required CPP contribution and any overpayment.



Illustration 3.5

Jeff worked for two different employers during the year. His total income for the year was $47,000 (all of which was pensionable) and his total CPP contributions were $2,153.25. The top part of Illustration 3.6 shows the calculation of Jeff’s required CPP contribution and resulting overpayment. Jeff will report $2,118.60 on Line 308 of Schedule 1 and claim a refund of $34.65 on Line 448 of his T1.


Illustration 3.6



Proration Requirements The CPP overpayment calculations carried out so far have been based on full-year pensionable limits. However, when a taxpayer’s contributory period is less than a full year, the maximum pensionable earnings and basic exemption must be reduced accordingly. This occurs when a taxpayer: turns eighteen during the year; draws CPP disability or retirement benefits for part of the year; or turns seventy or dies before December. In such cases, maximum pensionable earnings and the basic exemption are each prorated by dividing by twelve and multiplying the result by the number of months in the taxpayer’s contributory period (i.e., the period during which the taxpayer’s earnings are subject to CPP). The number of months in a taxpayer’s contributory period is determined as follows: For someone who turns eighteen, it is the number of months after, but not

including, the month in which the birthday occurs (for example, an eighteenth birthday in May yields seven qualifying months).

For someone who turns seventy, it is the number of months from the beginning of the year up to and including the month in which the birthday occurs (for example, a seventieth birthday in May yields five qualifying months).

For someone who receives a CPP disability or retirement pension for part of the year, it is the number of months during which the pension is not payable (for example, a pension which begins in September yields eight qualifying months).

For someone who dies, it is the number of months from the beginning of the year up to and including the month of death (for example, a death in October yields ten qualifying months).

Illustration 3.7

Herman turned eighteen in June. His earnings therefore qualify for CPP for six months (July through December). The CPP amounts are prorated as follows: maximum pensionable earnings 6/12 x $46,300 = $23,150 basic exemption 6/12 x $3,500 = $1,750 maximum earnings subject to contribution $23,150 – $1,750 = $21,400 maximum required contribution $21,400 x 4.95% = $1059.30




The complete version of CRA’s Form T2204 contains a chart that can be used to prorate amounts for CPP purposes. However, the H&R Block Canada Pension 2009 Proration Chart (shown in the TTS Reference Book) is substantially easier to use. With the H&R Block chart, you do not have to figure out the number of qualifying months; you only need to know the month in which the person turned 18, 70, or died, or the month in which the CPP disability or retirement pension began or ended. Simply look up the month in which the event occurred; the chart shows the corresponding prorated maximum pensionable earnings, the prorated basic exemption, and the resulting maximum required contribution. For example, if a taxpayer began receiving a CPP pension in July of 2009, find the column headed “Began Receiving CPP Retirement or Disability Pension,” then look down the column until you find July. Looking directly across to the three columns on the far right, you find the following: the maximum pensionable earnings are $23,150; the basic exemption is $1750.00; and the resulting maximum contribution is $1,059.30.


Remember that for employees who are subject to proration (i.e., who turned eighteen or seventy, or drew CPP benefits for part of the year, pensionable earnings are often less than total earnings. If so, the pensionable earnings will be found in Box 26 of the T4, rather than in Box 14. For persons who died during the year, the pensionable earnings are more likely to be equal to total earnings in Box 14; however, always check Box 26, just in case.

Illustration 3.8

Kevin died on October 28. His T4 shows that he earned $40,000 (all pensionable) and made CPP contributions of $1,806.75. Because Kevin died during the year, you must prorate his maximum pensionable earnings and basic exemption in calculating his required CPP contribution and overpayment: Pensionable earnings $38,583.33 Less basic exemption Contributory earnings $35,666.66

–2,916.67

His required contribution is 4.95% of $35,666.66 or $1,765.50. His overpayment is therefore $41.25, calculated as $1,806.75 minus $1765.50.





Employment Insurance Premiums The purpose of employment insurance (EI) is to replace part of the earnings lost by a person during a period of unemployment. The program is financed by both employee and employer contributions.

Maximum Premiums Employed persons are required to pay EI premiums on all their insurable earnings. For 2009, the maximum EI insurable earnings are $42,300 and the maximum premium outside of Quebec is 1.73% of that amount for a total of $731.79. For residents of Quebec, the premium rate is 1.38% for a maximum of $583.74. See Provincial Parental Insurance Plan below for more details. There is no minimum age required for earnings to be insurable. Neither does attaining sixty-five or seventy years of age exempt earnings from being insurable. Therefore no amount should ever be prorated when calculating the required EI contribution or any EI overpayment.

Employer Withholding Employers are required to withhold EI premiums from their employees’ pay according to tables published by the CRA. The amount of the EI premiums withheld is shown in Box 18 of the employee’s T4, and EI insurable earnings are shown in Box 24 if the amount is less than the total earnings in Box 14. If all of the earnings are exempt, a tick should appear in the EI portion of Box 28, and Boxes 18 and 24 should be blank.

EI Overpayment A taxpayer’s required EI premium is calculated by multiplying insurable earnings (Box 24 or Box 14) by 1.73%. In most cases, this is equal to the premium withheld, as shown in Box 18. In this case, the amount in Box 18 is reported on Line 312 of Schedule 1. EI underpayments are rare; however, they can occur if the employer makes a calculation error. This is because there is no basic exemption for EI. As a result, the premium is always 1.73% of insurable earnings, regardless of the number of employers. Should an underpayment occur, however, simply report on Line 312 the actual premiums deducted: the employee is not required to make up the difference. EI overpayments may occur, however, when employees work for more than one employer. This is because the combined insurable earnings may exceed the maximum, even though the insurable earnings from each employer are individually less than the maximum. In this case, the total premiums withheld will be more than the maximum, resulting in an overpayment. An overpayment is a refundable credit that may be claimed on Line 450 of the T1. The amount claimed on Line 312 is then limited to the required premium (i.e., the actual premiums paid less the overpayment to be refunded on Line 450).



EI overpayments can be calculated on the lower portion of the CRA Form T2204, shown in Illustration 3.6.

Illustration 3.9

Jeff, from Illustration 3.5, paid a total of $864.00 in EI premiums, and his T4s indicate that all his earnings were insurable. See the bottom of Illustration 3.6 to see how his EI overpayment is calculated. Jeff will enter $731.79 on Line 312 of Schedule 1, and $132.21 on Line 450 of his T1.

Since taxpayers with very low insurable earning are seldom entitled to receive EI benefits, a special provision allows them to receive a refund of EI premiums paid, even if they do not have an overpayment. Those with earnings under $2,000 receive a full refund. Those with earnings over $2,000 may receive a partial refund that is calculated by subtracting their earnings in excess of $2,000 from the premiums paid.

Illustration 3.10

Jill’s total insurable earnings were $2,020, and she paid $34.95 in EI premiums. Because Jill’s insurable earnings were so low, she gets a partial refund of $14.95, calculated as $34.95 minus $20 ($2,020 - $2,000).


Provincial Parental Insurance Plan In Quebec, maternity, parental, and adoption benefits for residents of Quebec are administered by the province. The Quebec Parental Insurance Plan (QPIP) replaces similar benefits that residents of other provinces receive under the Employment Insurance Act. Because of this difference, employees working in Quebec pay a reduced EI premium rate but also are required to pay PPIP premiums. Two boxes were on the T4 slip are used to report Provincial Parental Insurance Plan (PPIP) Insurable Earnings (Box 56) and Employee’s PPIP premiums (Box 55). Employees who live outside of Quebec at the end of the year but paid PPIP premiums as a result of working in the province of Quebec during the year should claim the sum of the amounts in Boxes 18 and 55 on line 312 of Schedule 1. The maximum PPIP premium for the 2009 is $300.08. Quebec residents will claim any PPIP overpayment on their provincial return. Employees who live outside of Quebec at the end of the year will claim any overpayment of EI and PPIP premiums using Form T2204.

Complete Q22 to Q24.



Canada Employment Amount Employees may claim the Canada Employment Amount, which is the lesser of : $1,044, and the employment income they reported on lines 101 and 104. The Canada Employment Amount, which is claimed on line 363 of Schedule 1, is a non-refundable credit equal to the amount of the claim times the lowest tax rate.

Summary

In this chapter you learned how to claim various types of employment deductions and credits.


Current-service and past-service RPP contributions for years after 1989 are deductible in full. Past-service contributions for years prior to 1990 are subject to special rules not covered in this course.

Employees can deduct union dues, and certain professional or membership dues and malpractice liability insurance premiums.

Employees who move in order to begin work at a new location may be able to deduct eligible moving expenses if the new home is at least 40 km closer to the new work location than the old home. The claim is limited by the amount of income earned at the new location. The claim is made by completing Form T1-M.

Employees who repay certain types of employment income that was previously included in income may deduct the amount in the year it was repaid.

Employees may deduct the taxable benefit related to the first $25,000 of an eligible home relocation loan.

Employees may deduct one-half the taxable benefit related to the exercise of eligible stock options in the year in which the benefit is included in income. Employees who elect to defer the benefit must complete Form T1212 each year until the deferred benefit is included in income.

Employees may claim a tax credit for required CPP contributions, and may claim a refund for any excess CPP contributions.

Employees may claim a tax credit for required EI premiums, and may claim a refund for any excess EI premiums.

CPP and EI overpayments can be calculated on Form T2204. Employees may claim the Canada Employment Amount.



Chapter 4 – Dependants

Introduction This chapter deals with several common tax credits and tax-related payments that taxpayers may claim for themselves and their dependants, including spouses or common-law partners. The qualifications for being considered a dependant are discussed, as are the definitions of child and spouse or common-law partner. This chapter focuses on the rules as they apply to family situations that remain stable throughout the year. The year of marital change will be discussed in a later chapter.


Identify the personal amounts to which a taxpayer is entitled, and how to enter them on the Schedule 1;

Define the tax meaning of “child,” “spouse,” and “common-law partner”; Calculate the spouse or common-law partner amount that a taxpayer may claim; Explain the rules for claiming an amount for an eligible dependant and calculate

the amount; Explain the rules for claiming the amount for children born in 1992 or later and

calculate the amount; Explain the rules for claiming the amount for infirm dependants age eighteen or

older, and calculate the amount; Explain the rules for claiming the caregiver amount, and calculate the amount; Complete Schedule 5; Explain the rules for claiming the public transit amount for the taxpayer and

dependants;

68 Chapter 4 – Dependants


Explain the rules for claiming the children’s fitness amount; Calculate a taxpayer’s total non-refundable tax credits; Determine who is eligible for the goods and services tax/harmonized sales tax

credit, and how to apply for and calculate the amount of the credit; Explain the eligibility rules for the Canada Child Tax Benefit; and Determine who must report income from the Universal Child Care Benefit and

explain what happens when UCCB amounts are repaid.

Glossary Before you read this chapter, review the following terms in the glossary: Credit; Indexing; Net income; Non-refundable tax credits; and Personal amounts.



Personal Amounts Personal amounts are specified non-refundable tax credits that taxpayers may claim for themselves and persons dependent on them for support. The purpose of the credits is to offset basic living expenses incurred by individuals for themselves and, if applicable, their dependants. This section focuses on the federal personal amounts. The rules for claiming the provincial personal amounts can be found in your provincial supplement. The federal personal amounts are claimed in the “Federal non-refundable tax credits” section of Schedule 1, which is shown in your TTS Reference Book. There are currently seven personal amounts: the basic personal amount, which can be claimed by all taxpayers; the age amount, which can be claimed if taxpayer is aged 65 or over; the spouse or common-law partner amount, which can be claimed by taxpayers

who support a spouse or common-law partner; the amount for an eligible dependant, which can be claimed by certain

unmarried taxpayers who support a dependant other than a spouse or common-law partner;

the amount for children born in 1992 or later (i.e. under 18 at the end of the year), which can be claimed by either parent of the child;

amounts for infirm dependants who are eighteen or older, which can be claimed by taxpayers who support such dependants; and

the caregiver amount, which can be claimed by taxpayers who maintain a dwelling for, and live with, a parent or grandparent 65 or older, or other relative who is 18 or over and infirm.

For each amount, there is a maximum allowable claim. Except for the basic personal amount and the amount for children, the claims are reduced if the net income of the dependant exceeds a specified threshold amount. The maximum allowable claims, and the limiting net income thresholds, are adjusted each year to reflect the increase in the Consumer Price Index. As a result, these amounts generally increase every year. The amount for children was first introduced for the 2007 tax year. Personal amounts are prorated if a taxpayer is not a resident of Canada throughout the year. But, as stated in Chapter 1, Income Tax I deals only with full-year residents of Canada; therefore, proration arising from part-year residence is not discussed here. However, proration as it applies to immigrants is dealt with in H&R Block — Immigrants and Visitors, which you may be taking as an optional segment of this course.



Dependants A dependant of a taxpayer is someone who relies on the taxpayer for support. For income tax purposes, a dependant must usually be a relative as well, either by blood, marriage, common-law partnership or adoption. Thus, depending on circumstances, a dependant might include a spouse or common-law partner, child, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew. In most cases, except for spouses or common-law partners, children or grandchildren, relatives must also be resident in Canada to qualify as dependants.

Support of Dependant To claim an amount for a dependant, a taxpayer must support that dependant at some time during the year. “Support” is not defined in the Income Tax Act, but is ordinarily taken to mean the provision of food, lodging, clothing, medical and dental care, etc. What constitutes support in one instance, however, may not be sufficient in another, and the CRA reserves the right to judge any ambiguous situation on its own merits. In any case, support need not be total support. Dependants may provide a measure of self-support, or may receive certain types of government support, without ceasing to be dependants. For example, a dependant confined to a hospital for most of the year may have his or her entire hospital care paid for by a provincial hospital plan. Nonetheless, if a supporting person furnishes clothing and other necessities, such as medical and hospital plan premiums, that person may still be able to claim a personal amount for the dependant. Finally, note that support need only be provided “at some time” during the year. This means that the taxpayer does not have to support the dependant for the whole year. In fact, support provided for only a brief period during the year may be sufficient.

Dependant’s Net Income Except for line 367 (Amount for children born in 1992 or later), the amount a taxpayer may claim for a dependant is limited by the dependant’s net income. Net income means the dependant’s net income as calculated on Line 236 of his or her T1 return. This does not mean that a dependant has to file a tax return in order to be claimed as a dependant (although it may be advisable), but it does mean that you have to calculate the dependant’s net income up to Line 236 in the same way as if he or she were actually filing a tax return. In most cases, the dependency claim is calculated using the dependant’s net income for the entire year, even if the taxpayer supported the dependant for only part of the year. The one exception to this rule is a claim for a spouse or common-law partner in the year of separation: in this case, net income is calculated for the period prior to separation rather than for the whole year (this exception is discussed further in a later chapter of this text).



It is important to note that just because someone has a net income of zero for tax purposes, it does not necessarily follow that he or she is a dependant (i.e., is supported by another). The evaluation of support must be made independently of net income. The net income test should only be applied if it is determined that a person is truly supported by another (and therefore qualifies as a dependant).

Definition of “Child” and “Parent” In speaking of dependants, the words “child” and “parent” are often used. The Income Tax Act defines “child” rather broadly, so that it includes any of the following: 1. the taxpayer’s own natural or adopted child; 2. any person who is dependent on the taxpayer for support and of whom the

taxpayer has custody and control, either in law or in fact; 3. any person of whom the taxpayer had custody or control immediately before that

person reached the age of 19; 4. the spouse or common-law partner of a taxpayer’s child (i.e., a daughter-in-law

or son-in-law); or 5. any child of the taxpayer’s spouse or common-law partner. Category (3) ensures that a parent-child relationship established under category (2) does not cease to exist when the dependant reaches the age of majority and is no longer under the parent’s custody and control. Category (4) extends the definition of child to include the child’s spouse or common-law partner; and category (5) ensures that any child of the taxpayer’s spouse or common-law partner is considered to be the taxpayer’s own child as well. The definition of “parent” is equally broad and covers exactly the same relationships. The extended definition does not include a foster child for whom the taxpayer receives support payments from an agency responsible for the child’s care.


Definition of “Spouse” and “Common-law Partner” The meaning of “spouse” for income tax purposes has undergone a series of changes over the last several years. In 1993, it was broadened to include common-law partners of the opposite sex. In 2001, when legislation was introduced to extend tax benefits to same-sex couples, a new tax term called “common-law partner” was introduced, which applied both to same-sex and opposite-sex couples. At this time, the definition of “spouse” was revised to its original meaning of a person to whom one is legally married.



As of January 1, 2001, the word “spouse” in the Income Tax Act means a person to whom one is legally married. The word “common-law partner” means a person (whether of the same or opposite sex) who; has lived with the taxpayer in a conjugal relationship for at least 12 continuous

months; is a parent of the taxpayer’s child; or has custody and control of the taxpayer’s child. A “conjugal relationship” is one in which two people live as a couple, even though they may not be legally married. However, it does not include a relationship in which two people are living in the same establishment simply to share expenses. Under the definition, a common-law partner must meet one of three conditions. Under the first condition of the definition, couples who move in together are considered common-law partners after they have lived together for a year.

Illustration 4.1

Terri and Karl moved in together on January 25, 2008, and have been living common law ever since. They are considered common-law partners for tax purposes as soon as they have lived together in a conjugal relationship for 12 months (i.e., on January 25, 2009).

Under the second condition of the definition, a couple with a child is considered common-law partners from the moment they begin cohabiting.

Illustration 4.2

Lil had a baby on November 1, 2008. Luigi, the father of the baby, moved in with her on January 6, 2009. Luigi is considered to be Lil’s common-law partner as of January 6, 2009, because he is living with her and is the parent of her child.

It is important to note that a separation of less than 90 days does not constitute an interruption of the “12 continuous months” period for purposes of determining whether or not a common-law couple is considered common-law partners. Prior to 2001, childless couples were considered to be common-law partners once they had completed their one-year cohabitation period, even if they had not been cohabiting for the previous twelve months.



Illustration 4.3

Walt and Dee moved in together on January 1, 2008. They separated for two months during the summer, then got back together. Walt and Dee are considered to be common-law partners as of January 1, 2009, even though, at that time, they had actually lived together for only ten months. This is because a separation of less than 90 days does not constitute an interruption of the “12 continuous months” period for purposes of determining common-law partner status. Walt and Dee separated once again on May 1, 2009, and got back together permanently on September 15, 2009. This separation, since it was more than 90 days, constitutes an interruption of the “12 continuous months” period. Unless Walt and Dee have a child together, they will not be considered to be common-law partners again until September 15, 2010.

Under the third condition of the definition, a “child” includes not only a natural or adoptive child, but any dependant who is under the taxpayer’s custody and control in law or in fact, and is wholly dependent upon the taxpayer for support. This means that individuals who exercise parental responsibility over their partners’ wholly dependent children are considered common-law-partners from the time they move in with their partners, even though they are not the biological or adoptive parents of the children.

Illustration 4.4

Mona is a single parent with a two-year-old child, Jane. Mona’s current boyfriend, Derek, moved in with Mona and Jane on March 1. Derek provides complete support to Jane and assumes his share of the parental responsibilities. Although Derek is not Jane’s biological or adoptive parent, she is still considered his child, because she is wholly dependent on him, and he exercises custody and control over her. As a result, Derek is considered to be Mona’s common-law partner as soon as he moves in, because he is living with her and is the “parent” of her child.

Finally, this definition means that a taxpayer may have more than one spouse or common-law partner in the same year, at least for tax purposes.

Illustration 4.5

Jim is separated from Gabrielle, to whom he is still legally married. In the meantime, Jim has been living common-law with Christie for the past year and a half. Jim therefore has two spouses or common-law partners for tax purposes: Gabrielle, to whom he is still legally married; and Christie, with whom he is living common-law. When Jim files his tax return, he should report his marital status as “living common law” as this reflects his current living arrangements.



On the tax return, taxpayers must indicate their marital status as of December 31.

Same-Sex Partners Since 2001, same-sex common-law partners have been required to declare their common-law status on their tax returns. As a transitional measure, same-sex common-law partners could jointly elect to be assessed as such for 1998, 1999, and 2000.


Basic Personal Amount Every taxpayer is allowed to claim a basic personal amount. This claim is not limited in any way by the taxpayer’s own income. For 2009, the basic personal amount is $10,320, and is claimed on Line 300 of Schedule 1.

Spouse or Common-law Partner Amount Anyone who supports a spouse or common-law partner may claim this amount. Only one partner can make the claim, however — it is not possible for both to do so. To make the claim, it is necessary for the person to meet the definition of a spouse or common-law partner at some time during the year, and for the claimant to provide support during that period. This means that the couple need not be married or living common-law for the entire year. It is sufficient that they do so for only part of the year, so long as the claimant provided support during that period. In the case of spouses or common-law partners, the presumption is that each supports the other, providing each contributes towards their common expenses. The maximum claim for a spouse or common-law partner for 2009 is $10,320. The claim is reduced on a dollar-for-dollar basis by any net income of the spouse or common-law partner. This means that the claim is reduced to zero if the partner’s net income is $10,320 or more. The claim is calculated on Schedule 1, and is performed by subtracting the spouse’s or common-law partner’s net income from $10,320. The result is the amount to claim on Line 303.



Illustration 4.6

Kevin and Mary are married. Kevin’s net income is $30,000. Mary’s net income is $4,000. Because Kevin supported Mary by contributing to their common expenses, he may claim the spouse or common-law partner amount for her. He can claim $6,320, calculated as $10,320 – $4,000. Kevin will make the claim by completing the spouse or common-law partner amount section of his Schedule 1 as shown below.

Supported spouses and common-law partners may still claim the full basic personal amount of $10,320 on their own returns regardless of the spouse or common-law partner amount claimed by their supporting spouses or common-law partners. Although a taxpayer may have more than one spouse or common-law partner during the tax year, only one spouse or common-law partner amount can be claimed. If a taxpayer has actually supported more than one spouse or common-law partner, he or she should claim the one with the lowest net income for the year. Remember, the net income to be used in calculating the spouse or common-law partner amount is the spouse or common-law partner’s net income for the entire year, except in the year of separation.



Amount for an Eligible Dependant The amount for an eligible dependant has the same dollar value as that of the spouse or common-law partner amount. The amount is intended to provide tax relief to single taxpayers supporting other dependants in the same way that the spouse or common-law partner amount provides tax relief to taxpayers supporting a spouse or common-law partner. Like the spouse or common-law partner amount, the claim amount is $10,320 for a dependant whose net income is zero. If net income is non-zero, but less than $10,320, the claim is equal to $10,320 minus the dependant’s net income. If net income is over $10,320, the claim is zero. Remember that net income means the dependant’s net income for the entire year. There are several conditions that must be met in order for a taxpayer to be eligible to claim the amount for an eligible dependant. A summary of these eligibility requirements is provided in the Amount for an Eligible Dependant Checklist shown in the TTS Reference Book. The commentary below explains each requirement in detail.



Amount for an Eligible Dependant Checklist

Marital Status To be eligible to claim the eligible dependant amount, a taxpayer must be single, widowed, divorced, or separated at some time during the taxation year. This means that taxpayers who get married or start living common-law during the year may be eligible to claim the amount (for the part of the year during which they were still single, widowed, divorced or separated). However, anyone who is married or living common-law throughout the entire year is not eligible.

Separation A taxpayer can make a claim for an amount for an eligible dependant on the basis of separation only if the separation is the result of a breakdown of the relationship. Taxpayers separated for other reasons, such as job postings, illness, etc., do not qualify. However, because it is not necessary to be separated throughout the year, a claim may be made even if the separation lasts only a short time, provided all the other requirements are met. To be eligible to claim an amount for an eligible dependant, separated taxpayers may not support, nor be supported by, their spouse or common-law partners during the period of separation. Support in this context does not include amounts required to be paid pursuant to a court order or written agreement.

Illustration 4.7

Lucy and John separated on May 1 and reconciled on June 15. Lucy supported herself and her son, Richie, during the period of separation. Lucy may claim an amount for an eligible dependant for Richie in respect of the period during which she was separated, even though the separation lasted only a short time.

Support In order to claim an amount for an eligible dependant, the taxpayer must not only support the dependant — the dependant must be wholly dependant on him or her (at least at some time during the year). Therefore, in order to claim the eligible dependant amount, the support must be fairly substantial.

Relationship The claim for the eligible dependant amount is restricted to the following relatives: a child or parent of the taxpayer or of the taxpayer’s spouse or common-law

partner; a direct-line descendant or ancestor of the taxpayer or of the taxpayer’s spouse

or common-law partner (i.e., grandchild, great-grandchild, grandparent, or great-grandparent);



the spouse or common-law partner of a direct-line descendant or ancestor of the taxpayer;

a brother or sister of the taxpayer or of the taxpayer’s spouse or common-law partner; or

the spouse or common-law partner of the brother or sister of the taxpayer or of his or her spouse or common-law partner.

Because relatives such as uncles, aunts, nephews, and nieces are not listed, this means that they cannot be claimed under an amount for an eligible dependant provisions unless they fall under the extended meaning of “child” or “parent” discussed earlier.

Illustration 4.8

John, a single taxpayer, has custody of and supports his handicapped nephew, Tom, who is sixteen years of age. John can claim an amount for an eligible dependant for his nephew, since he is John’s “child” according to the extended meaning of the term. If John has custody and control of Tom until the time he turns nineteen, Tom will continue to be John’s “child” for income tax purposes, even though he is no longer under his custody or control. Therefore, John will continue to be able to make the claim, provided he continues to meet the other conditions.

Residency The dependent person must be a resident of Canada, except in the case of the taxpayer’s child.

Under Eighteen or Infirm (Except for Parents or Grandparents) An amount for an eligible dependant can be claimed only if the dependant is: under eighteen years of age; or mentally or physically infirm; or a parent or grandparent. This means that a single taxpayer who is supporting a parent or grandparent can claim an amount for an eligible dependant without regard to either age or infirmity. However, a taxpayer who is supporting another dependant, e.g., a child, grandchild, brother or sister, cannot claim an amount for an eligible dependant unless the dependant is either under 18 or mentally or physically infirm (see page 81for discussion of infirmity). Note that the dependant need not be under eighteen or infirm throughout the year, but only at the time the claimant is eligible to make the claim.



Illustration 4.9

On July 1, Barbara’s husband died. Her daughter, Lisa, had turned eighteen on June 30, the day before. Barbara cannot claim an amount for an eligible dependant for Lisa, even though she supported Lisa and was a widow for part of the year. This is because Lisa was not under eighteen at any time during which Barbara was eligible to make the claim, i.e., after she became a widow. If Barbara had become a widow on June 29, while Lisa was still under eighteen, Barbara would have been eligible to claim an amount for an eligible dependant.

Residing In and Maintaining the Dwelling The taxpayer, either alone or jointly with others, must maintain the dwelling in which he or she lives or supports the dependant in question. The dwelling must be a “self-contained domestic establishment,” which the Income Tax Act defines as a “dwelling-house, apartment or other similar place of residence” in which the taxpayer and the dependent person as a general rule both eat and sleep. Thus, a room (or rooms) in a boarding house does not qualify, nor does a hotel room. A taxpayer may claim a dependant who lives away from home while attending school provided the student usually returns home to live when not at school.

One Claim per Dwelling Although a taxpayer is not required to be the only one who maintains the dwelling in which both he or she and the dependant live, only one amount for an eligible dependant claim per dwelling can be made. For example, if two sisters, both divorced, are living together in the same house and each is supporting one child, only one of the sisters is entitled to claim an amount for an eligible dependant.

Other Restrictions The following additional restrictions apply to the claim for the amount for an eligible dependant: A taxpayer may never claim both the spouse or common-law partner amount

and the amount for an eligible dependant. If eligible for both (as might happen in the year of marriage or separation), the taxpayer must choose one or the other.

A taxpayer may claim only one amount for an eligible dependant. If a taxpayer supports more than one dependant, a choice must be made as to which one to claim for the eligible dependant amount.

No one can claim an eligible dependant amount for a dependant for whom someone has claimed the spouse or common-law partner amount if, throughout the entire year, that dependant was married or living common-law and was not separated because of a breakdown of the relationship.



A taxpayer may not claim an amount for an eligible dependant for any child for whom he or she is required to make child support payments, except in the year of separation or reconciliation. If during the year both the taxpayer and another person were required to make child support payments for the same dependant and as a result of the ruling no one could claim an amount for an eligible dependant then an agreement may be made to allow either to make a claim.

Claiming the Amount The amount for an eligible dependant is claimed in the first section of Schedule 5 (shown in the TTS Reference Book), and is then transferred to Line 305 of Schedule 1.

Schedule 5

To claim the amount, proceed as follows: On Schedule 5, enter the taxpayer’s date of marital change, if applicable. Enter the dependant’s name, address, date of birth, net income, and relationship

to the taxpayer. In most cases, the dependant’s address will be the same as the taxpayer, since the dependant must have lived with the taxpayer during the period for which the claim is being made. However, if the dependant has since moved, the address may be different.

If the dependant was not under 18 at some point during the year, and is neither the taxpayer’s parent nor grandparent, indicate the nature of the dependant’s infirmity.

Calculate the claim by deducting the net income of the dependant from $10,320 and enter the result in the last column of Schedule 5. Note that the calculation is similar to the spouse or common-law partner amount.

Transfer the claim to Line 305 of the taxpayer’s Schedule 1.

Illustration 4.10

Gilda Grant is a widow. She has two children: Sandra and Paul, both of whom are under 18. Sandra’s net income is $2,500 and Paul’s is $1,200. Because Gilda can claim only one amount for an eligible dependant, she must choose which dependant to claim. If she chooses to claim Paul, her amount for an eligible dependant claim would be $9,120. If she chooses to claim Sandra, however, the claim would be only $7,820. Gilda decides to claim Paul, since this provides a greater tax advantage. The calculation is shown below along with the relevant section of her Schedule 5. Gilda will enter the claim of $9,120 on Line 305 of her Schedule 1.





Amount for Children Under 18 Beginning in 2007, since the introduction of non-refundable credits in 1988, parents may claim a personal amount for children under the age of 18. The amount of the claim is $2,089 per child and is not affected by the child’s income. If the child resided with both parents throughout the year then either parent may claim the amount. Where the parent who makes the claim does not require the full amount to reduce their income taxes to zero, the amount may be transferred to the other parent using Schedule 2. Such transfers are discussed in Chapter 8. When the child does not reside with both parents throughout the year, only the parent who is eligible to claim the amount for an eligible dependant (or would be if they were the only child living with them) may make the claim for the child. For children who are born or die during the taxation year, “throughout the year” means during the period when the child was alive. Claiming this amount does not affect any other claims that may be made for the same child. Enter the number of children for whom the claim is being made on line 366 and claim the amount on line 367.

Illustration 4.11

Heather and Ben have three small children: Kyle who is 4 years old, Amber who is 2 years old, and Justin who was born in 2008. Either Heather or Ben may claim $2,038 for each of the children. As Heather’s only income is the Universal Child Care Benefit she receives for the children, Ben makes a claim for all three children (total $6,114) on line 367 as shown below.

2009 General Income Tax and Benefit Guide, pages 33




Amount for Infirm Dependants Age 18 or Older A taxpayer may claim a personal amount for a dependant who is: eighteen or over at the end of the year; mentally or physically infirm; does not live with the taxpayer; and a resident in Canada (except for children or grandchildren). The list of relatives for which the infirm dependant amount may be claimed is more extensive than for the eligible dependant amount. The list includes: a child or parent of the taxpayer or of the taxpayer’s spouse or common-law

partner; a grandchild, grandparent, brother, sister, uncle, aunt, niece or nephew of the

taxpayer or of the taxpayer’s spouse or common-law partner. This amount may never be claimed for the taxpayer’s spouse or common-law partner nor for a person who was only visiting the taxpayer.

Meaning of Infirmity The Income Tax Act does not define what is meant by “infirmity” and, therefore, it takes its ordinary meaning. To claim the amount for infirm dependants, the CRA states that the “dependency must be brought about solely by reason of the infirmity, and the degree of the infirmity must be such that it requires the person to be dependent on the individual for a considerable period of time.” Temporary illness is expressly not classed as infirmity. To claim the amount, the CRA requires a taxpayer to have a doctor’s letter that describes the “nature, commencement, and duration of the dependant’s infirmity.” This letter must be kept on file in case the CRA asks to see it; it need not be submitted with the return. Note that, unlike an amount for an eligible dependant, there is no exception to the infirmity requirement for parents. In all cases, a dependent parent must be infirm in order for a taxpayer to claim this credit. Furthermore, under no circumstance will a dependant automatically be considered infirm by reason of being sixty-five years of age or older.

Restrictions If someone has claimed an eligible dependant amount for an individual, that person is the only one who can claim the infirm dependant amount for that same individual. In this case, the infirm dependant amount must be reduced by the eligible dependent amount. The amount for an infirm dependant may not be claimed if a taxpayer is entitled to claim the caregiver amount (explained in the next section) for that dependant.



Claiming the Amount The amount for infirm dependants age 18 or over is claimed in the second section of Schedule 5, and the amount is calculated on page 2 of the Federal Worksheet. To claim the amount, proceed as follows: On Schedule 5, enter the dependant’s name, address, year of birth, net income,

and relationship to the taxpayer. Enter the nature of the dependant’s infirmity. Calculate the claim using the chart for Line 306 on the Federal Worksheet and

enter the line number (306) and the calculated claim in the last column of schedule 5. The claim is equal to $10,154 minus the dependant’s net income (maximum $4,198), minus any amount claimed for the same dependant on Line 305.

Transfer the claim to Line 306 of the taxpayer’s Schedule 1. In contrast to the eligible dependant amount: The amount for infirm dependants may be split with another person, provided

that other person also provided support. Thus, two taxpayers can claim an amount for the same dependant so long as the combined amounts claimed do not exceed the allowable maximum. If two taxpayers cannot agree on the amount each will claim, the CRA may fix the portions;

Only one amount for an eligible dependant claim per dwelling can be made but more than one infirm dependant may be claimed.

Illustration 4.12

Louise supports her aunt, Lorraine Larochelle (born June 6, 1943), who lives in a small apartment near Louise. Lorraine’s address is 123 Main Street. Throughout the year Lorraine was confined to a wheelchair, and her net income for the year was $4,000. Louise is claiming the infirm dependant amount for her aunt. The calculation is shown below along with the relevant section of her Schedule 5. Louise will enter her claim of $4,198 on Line 306 of her Schedule 1.

On occasion, you may be confronted with a situation that offers the possibility of alternative claims. You will need to study the facts of each case to determine the most advantageous arrangement.





Caregiver Amount The caregiver amount may be claimed by taxpayers who, at some time during the year, maintained a self-contained domestic establishment in which they lived with a dependent relative who is: eighteen or over at the end of the year; ordinarily resident with the taxpayer (the amount cannot be claimed for a

person who is only visiting); dependant on the taxpayer due to mental or physical infirmity; or is age 65 or

older and is the parent or grandparent of the taxpayer or the taxpayer’s spouse or common-law partner; and

resident in Canada (except for a child or grandchild). The relatives who can be claimed are: the child or grandchild of the taxpayer or of the taxpayer’s spouse or common-

law partner; or the brother, sister, niece, nephew, aunt, uncle, parent or grandparent of the

taxpayer or of the taxpayer’s spouse or common-law partner. Like the claim for infirm dependants, the maximum allowable claim is $4,198. However, the threshold at which the claim begins to be reduced is higher and thereby allows taxpayers to make claims for seniors who are receiving Old Age Security and the Guaranteed Income Supplement (these types of income are discussed in a later chapter). The caregiver amount has the following traits in common with the amount for infirm dependants: The amount may be split with another person, if both are supporting the

dependant, but the combined amount cannot exceed the maximum allowed for that dependant.

More than one dependant relative may be claimed. If anyone is claiming the eligible dependant amount for a dependant, then that

person is the only one who can claim the caregiver amount for that dependant. In this case, the caregiver amount must be reduced by the eligible dependant amount claimed.

Claiming the Amount The caregiver amount is claimed in the third section of Schedule 5, and the amount is calculated on page 2 of the Federal Worksheet. To claim the amount, proceed as follows: On Schedule 5, enter the dependant’s name, address, year of birth, net income,

and relationship to the taxpayer. In most cases, the dependant’s address will be the same as the taxpayer, since the dependant must have lived with the taxpayer during the period for which the claim is being made. However, if the dependant has since moved, the address may be different.



Enter the nature of the dependant’s infirmity, if applicable. Calculate the claim using the chart for Line 315 on the Federal Worksheet and

enter the line number (315) and the calculated amount in the last column of Schedule 5. The claim is equal to $18,534 minus the dependant’s net income (maximum $4,198 and minimum of zero), minus any amount claimed for the same dependant on Line 305.

Transfer the claim to Line 315 of the taxpayer’s Schedule 1.

Illustration 4.13

Lou and his wife took his infirm mother, Adele, into their home to live. Adele’s net income is $6,000; she was born November 15, 1939. Lou is eligible to claim the caregiver amount for his mother. The calculation and relevant section of Lou’s Schedule 5 are shown below.



Public Transit Passes Amount Taxpayers may claim non-refundable tax credit for the cost of an eligible public transit pass purchased on or after July 1, 2006. This claim may be made by the taxpayer or the taxpayer’s spouse or common-law partner in respect of eligible transit costs of the taxpayer, the taxpayer’s spouse or common-law partner, and the taxpayer’s dependent children who have not attained the age of 19 during the year. The claim may be split between two taxpayers so long as the total amount claimed does not exceed the actual amount paid. An eligible public transit pass is defined as a document issued by or on behalf of a qualified Canadian transit organization that identifies the right of an individual to use public commuter transit services of that organization on an unlimited number of occasions and on any day during which the services are offered during an uninterrupted period of at least 28 days. Claims may be made for the purchase of passes of shorter duration if each pass entitles the bearer to unlimited travel for a period of at least 5 days and the taxpayer purchases enough passes so that they are entitled to unlimited travel for at least 20 days in a 28-day period. The cost of electronic payment cards may be claimed where they are used for at least 32 one-way trips in an uninterrupted period not exceeding 31 days. For both annual and electronic passes only the portion of the cost that relates to the tax year may be claimed.



Public transit will include transit by: local bus streetcar subway commuter train commuter bus local ferry Taxpayers making claims will be required to retain their receipts or passes for verification purposes. A transit pass will be sufficient to support a claim for the tax credit if it displays all of the following information: an indication that it is a monthly (or longer duration) pass; the validation date or period; the name of the transit authority or organization issuing the pass; the amount paid for the pass; and, the identity of the rider, either by name or unique identifier.

Claiming the Amount The amount for public transit passes is claimed on line 364 of Schedule 1. No worksheet is provided to calculate the amount of the claim. If the amount for public transit passes is reimbursed by the employer and the amount is not included as a taxable benefit reported on the T4, then no claim is allowed.

Illustration 4.14

William travels to work each day by public transit. He acquired an electronic payment card that entitles him to unlimited use of the transit system at a cost of $1.00 per trip. He used his pass five days a week all year and paid $520 for the year. He can claim the full amount paid for the transit pass.

Illustration 4.15

Jim and Lynn’s daughter Heather is 17. She completed high school in June and started attending university in September while continuing to live at home. In order to get to her classes Heather needed transportation, so Jim purchased a student transit pass for $50 per month. The $200 paid for the bus pass (September to December) may be claimed by Heather, Jim, or Lynn. The claim is identical no matter who makes it.



Children’s Fitness Amount Beginning in 2007 and in later years, parents may claim up to $500 per child (under the age of 16 at the beginning of the year) for amounts paid in the tax year that relate to enrolling the child in a prescribed program of physical activity. A prescribed program of physical activity is defined as an ongoing program intended to enhance the physical strength, balance and endurance of participating children. This credit may be claimed by either parent or split between them so long as the total amount claimed does not exceed the allowable claim. To be eligible for the credit, fees must be paid in respect of eligible expenses in an eligible program of physical activity. Expenses incurred for the following items are eligible for the children's fitness tax credit: operation and administration of the program instructions renting facilities equipment used in common (e.g. team jerseys provided for the season) referees and judges incidental supplies (e.g. trophies). Expenses that are not eligible include the purchase or rental of equipment for exclusive personal use, travel, meals and accommodation. The claim for the children’s fitness amount is made on line 365.

Illustration 4.16

Cory and Erwin’s daughter Pam is 14 years old. In the year, she was enrolled in a swimming program at the local community centre. The cost of the program was $200. The program issued receipts indicating that the program qualified as a prescribed program. Cory or Erwin may claim $200 at line 365 for the cost of the program.

Children with Disabilities A child under the age of 18 at the beginning of the year and if the child qualifies for the disability amount (discussed in Chapter 8), then an additional amount of $500 can be claimed provided at least $100 is paid on registration or membership fees for a prescribed program of physical activity.



Illustration 4.17

If Pam (in previous illustration) is disabled, then Cory or Erwin may claim $700 ($200 + $500) on line 365.



Federal Non-Refundable Tax Credits Federal non-refundable credits are calculated on Schedule 1, which is shown in the TTS Reference Book. These credits are intended to provide income tax relief to taxpayers for the cost of living for themselves and their dependants, and to provide additional tax relief to certain groups of taxpayers such as students, the disabled, or those with high medical expenses. The credits reduce the amount of federal tax an individual must pay, but only to the amount of tax owed. They are called “non-refundable” because if their total exceeds the tax owing, the difference is not refunded to the taxpayer. A taxpayer’s total non-refundable tax credits are calculated by adding up all the personal and other amounts from Lines 300 to 326 (including lines 363 to 369), plus Line 332. The result, on Line 335, is then multiplied by 15%. This result, at Line 338, is increased by the credit for charitable donations (discussed in Chapter 7) to arrive at the total non-refundable tax credits at Line 350. So far, you have learned about several amounts that enter into the calculation of the non-refundable tax credits: the personal amounts (Lines 300, 303, 305, 367, 306, 364, 365, and 315), which you studied in this chapter, and CPP contributions, EI premiums and the Canada Employment Amount (Lines 308, 312 and 363), which you studied in Chapter 3. In later chapters you will learn about other amounts that enter into the calculation.


Goods and Services Tax/Harmonized Sales Tax Credit Application The Goods and Services Tax/Harmonized Sales Tax credit (GST/HST credit) is intended to offset, at least in part, the GST/HST paid in a year by individuals and families with low to moderate incomes. The GST/HST credit is applied for on page 1 of the T1 General. The only way to obtain the GST/HST credit is to file an income tax return and make an application.



The credit is paid in four quarterly instalments. The credit application submitted as part of the 2009 tax return is an application for the payments to be made in July and October, 2010, and in January and April, 2011. However, if the total GST/HST credit is less than $100, only one lump-sum payment will be made in July, 2010. The GST/HST credit can be adjusted by the CRA to reflect changes in a family’s situation. If the CRA is notified at the time of the change, an adjustment will occur in the subsequent quarter. Note that no part of this credit is paid as part of an income tax refund. Note, too, that GST/HST credit payments are among those listed in Chapter 1 as not to be included in income and should therefore never be entered on the tax return.

Eligibility To qualify for the GST/HST credit, a taxpayer must be resident in Canada and, at the beginning of the month in which a payment is made, must be: nineteen years of age or over; married or have a common law partner; or the parent of a child. Individuals are able to receive the GST/HST credit as soon as they turn 19, provided they applied for the credit on their tax returns. This means that 18-year-olds should file a tax return and tick “yes” to the GST/HST application. Individuals are not eligible for the GST/HST credit if, at the beginning of the month in which a payment is made, they were: exempt from tax in Canada (foreign diplomats, for example); or confined to a prison or a similar institution for a period of 90 days at the

beginning of the month in which the GST/HST payment is made.

Applying for the Credit The application for the Goods and Services/ Harmonized Sales Tax credit appears on page 1 of the return. The only required entry is the answer to the question “Are you applying for the GST/HST credit?” Each taxpayer should tick either the “yes” or “no” box. Eligible single taxpayers must always apply for their own GST/HST credit. Married or common-law couples, however, must have one partner apply for the credit on behalf of both. It is up to the couple to decide which one should apply.

Calculating the Credit The calculation of the Goods and Services/Harmonized Sales Tax credit does not appear anywhere on the tax return, nor does it appear in the General Income Tax and Benefit Guide. However, for those taxpayers who would like to know what their credit will be for July 2010 to June 2011, the calculation is fairly simple, and is described below.



Basic Credit A basic GST/HST credit of $250 is available to all eligible applicants.

Credit for Spouse or Common-law Partner A credit of $250 is available for a spouse or common-law partner if the taxpayer is living with a spouse or common-law partner as of December 31.

Credit for an Eligible Dependant A credit of $250 for an eligible dependant is available to taxpayers who: are not married or living common-law at the end of the year; and have a qualified child under nineteen at the end of the year for whom they are

eligible to claim the eligible dependant amount on Line 305, and for whom no other person is claiming a GST/HST credit.

Do not confuse the rules for claiming the eligible dependant personal amount (discussed earlier in this chapter) with the GST/HST credit for an eligible dependant. Although the two often coincide, it does not necessarily follow that claiming the one makes a taxpayer eligible for the other. For example, taxpayers who get married during the year might qualify to claim the eligible dependant amount for a child, but would not be eligible for the GST/HST credit for an eligible dependant. This is because taxpayers who have a spouse or common-law partner as of December 31 do not qualify for the GST/HST credit for an eligible dependant. You will not go wrong if you remember to apply each set of rules independently.

Credit for Eligible Children A credit of $131 is available for each eligible child except those who qualify for the GST/HST credit for an eligible dependant. An “eligible child” is a child of the taxpayer or of the taxpayer’s spouse or common-law partner who: 1. is under nineteen and is neither married nor a parent; and 2. either lived with the taxpayer at the end of the year, or was claimed as a

dependant (on Line 305 or 306) by the taxpayer or the taxpayer’s spouse or common-law partner.

The above rules mean a child can be the qualified child of more than one taxpayer. For example, a child of divorced parents may live with one parent for the first part of the year and be claimed at Line 305, and then live with the other parent at the end of the year. However, another rule states that only one taxpayer can claim a GST/HST credit for a particular child. In case of conflicting claims, the parties must decide who will make the claim.

Additional Credit An additional credit, with a maximum value of $131, is available to applicants who, at the end of the year, were neither married nor living common-law. Singles with children are entitled to the full additional credit regardless of their income. For singles without children, the additional credit is calculated as 2% of their net income (excluding UCCB) in excess of $8,096, to a maximum of $131. It is interesting to note that most means-tested credits (including the GST/HST credit) are reduced by higher income: if someone has more money, that person is in less



need of assistance. Interestingly, in a narrow range of income (from $8,096 to $14,646) the additional GST/HST credit rises as income goes up. The reason is that someone with a higher income is presumed to have spent more during the year, and therefore also to have paid more GST/HST. Since the point of the credit is to offset the GST/HST paid, the higher-income person receives the higher credit.

Illustration 4.18

Felix and Hector are both single and have no dependants. Both are eligible for the GST/HST credit. Felix has an income of $9,000 while Hector has an income of $11,000. One would think Felix needs more assistance than Hector because he has the lower income. However, Felix receives an additional credit of only $18.08 (2% of $9,000 – $8,096) while Hector receives an additional credit of $58.08. (2% of $11,000 – $8,096). This larger sum offsets the additional GST/HST he presumably paid during the year.

Determining the Credit The GST/HST credit payable is equal to the total of the credits listed above reduced by 5% of family net income (excluding the UCCB) in excess of $32,506. Family net income is the sum of Line 236 income for the taxpayer and, if applicable, the taxpayer’s spouse or common-law partner. The total GST/HST credit is then divided by four to determine the quarterly payments for July and October, 2010, and January and April 2011. Because the GST/HST credit is reduced by family net income over $32,506 some taxpayers find the amount they are eligible to receive is reduced to zero. However, because the application is so simple, we recommend that all eligible individuals apply for the credit, even if their income appears to be too high, and let the CRA determine whether or not an amount is payable. This will prevent taxpayers from not receiving the credit simply because they failed to apply for it.

Illustration 4.19

Because he has not taken Income Tax I, Clint made a mistake on his tax return. Because of the error, Clint thought his net income was too high for him to receive the GST/HST credit, and therefore he did not apply for it on his return. When the CRA assessed Clint’s return, the error was found, and his net income was lowered enough so that he was eligible to receive the credit. If Clint realizes this, he can ask to have his return adjusted in order to apply for the credit. However, if he doesn’t do this he will lose the credit simply because he did not apply for it. Remember that the GST/HST credit calculation is for information purposes only. Do not enter the amount anywhere on the tax return.



Illustration 4.20

Don and Lori Myer have four small children. Don’s net income at Line 236 of his return is $29,000. Lori’s net income is $4,000 (excluding the UCCB she received). Don and Lori agree that Don will apply for the GST/HST credit for the family by ticking the application box on page 1 of his return. His GST/HST tax credit is calculated as follows: Basic credit $250.00 Credit for spouse or common-law partner 250.00 Credit for children (4 x $131) Total credit before reduction $1,024.00

524.00

Family net income $33,000 Less base amount Income over base amount 494

–32,506

Reduction (5% of $494) = Total credit after reduction $999.30

24.70

The total credit is therefore $999.30. Don will receive one quarter of this amount, or $249.83, in July and October of 2010, and in January and April of 2011.



Canada Child Tax Benefit The Canada Child Tax Benefit is a non-taxable benefit paid to low- and middle-income families with children. The monthly payment is based on the number of qualifying children at the beginning of the month, and on the taxpayer’s family income during a “base taxation year” (for benefits paid from July 2010 to June 2011, the base taxation year is 2009). Because the amount of the Canada Child Tax Benefit is based on income, taxpayers must file tax returns in order to receive it. If a person is married or living common law, both spouses must file returns. Like the GST/HST credit, the payments received are not included in income and should not be reported on the tax return.

Eligibility In order to receive the Canada Child Tax Benefit for a child for a given month a taxpayer must: be the parent who primarily fulfills the responsibility for the child’s care and

upbringing;



live with the child; be a resident of Canada for tax purposes; be a Canadian citizen, a permanent resident, a visitor or holder of a permit who

was resident in Canada throughout the preceding eighteen-month period, or a Convention Refugee as determined by the Immigration and Refugee Board, or have a spouse or common-law partner who meets one of these conditions; and

not be exempt from tax under Section 149 of the Income Tax Act (i.e., not be an officer or servant of a foreign government, or a family member of such a person).

The CRA must also be informed if there is a change in the taxpayer’s marital status.

Qualifying Children A child qualifies for a monthly Canada Child Tax Benefit if all the following conditions are met: The child is under the age of eighteen at the beginning of the month; No one claimed a spouse or common-law partner amount for the child in the

base taxation year; and A special allowance is not being paid for the child under the Children’s Special

Allowances Act. Note that a qualifying child does not include a child in foster care or a child in someone else’s custody, since a parent must live with the child in order to be eligible to receive the Canada Child Tax Benefit. In the rare situation where a child under the age of eighteen is married, and the couple lives with the parent(s) of the underage spouse or common-law partner, a combined tax saving may be produced if the child’s spouse or common-law partner does not claim a spousal amount so that the parent is eligible for the Canada Child Tax Benefit. However, an amount for an eligible dependant claim for a child has no effect on that child’s eligibility for the Canada Child Tax Benefit.

Family Income The amount of the Canada Child Tax Benefit received depends on net family income, which is the Line 236 income of the applicant plus that of the applicant’s spouse or common-law partner. For the purposes of this credit, the UCCB received is not included in either spouse’s net income.

Basic Benefit The amount of the Canada Child Tax Benefit for the July 2010 to June 2011 period is $1,348 for each child. There is an additional $94 amount for the taxpayer’s third and each additional child. If the family net income is more than a $40,970 threshold, there is a reduction to the combined basic benefit and supplement, calculated as 2% of the family net income exceeding $40,970 for families with one child, and 4% for families with two or more children.



For years prior to the 2006-2007 benefit year, the Canada Child Tax Benefit included a supplement for children under the age of 7. This supplement was eliminated when the Universal Child Care Benefit (UCCB) was introduced in July of 2006. See below for a discussion of the UCCB.

National Child Benefit Supplement In addition to the basic benefit for the July 2010 to June 2011 period, there is also the National Child Benefit Supplement which is $2,088 for the first child, $1,848 for the second child and $1,758 for each additional child. There is a reduction to the National Child Benefit Supplement if the 2009 family adjusted net income is more than $23,855. The reduction is 12.2%, 23%, and 33.3% for one, two, and more than two children respectively. Over the past several years, an increasing number of provinces have agreed to provide provincial supplements to the Canada Child Tax Benefit. The amounts vary from province to province, as do the net income thresholds beyond which benefits are reduced. Most provincial supplements are administered by the CRA and are included with the monthly Canada Child Tax Benefit payment.

Child Disability Benefit Supplement Disabled children also qualify for an additional child disability benefit supplement. For the July 2010 to June 2011 period, the supplement is $2,470 for each eligible child and is reduced if the 2009 family adjusted net income is more than $40,970. The reduction is 2% of the family net income exceeding $40,970 for families with one child, and 4% for families with two or more children.

Application It is not necessary to re-apply for the Canada Child Tax Benefit each year. Once the initial application is made, the benefit is sent automatically to the eligible parent, provided the necessary tax returns have been filed. The benefit is also automatically adjusted when a child turns 7 or 18. However, a new application must be submitted in the following cases: when a child is born; when a child who was in someone else’s care begins to live with the taxpayer; when a child of a landed immigrant or Convention refugee arrives in Canada. The application is made by submitting a completed Form RC66 Canada Child Tax Benefit Application. Since the benefit amount is based on the number of qualifying children, taxpayers are required to notify the CRA immediately if any of the following changes occur: the child is no longer in the care of the recipient; the child stops living with the recipient; the child dies; or the recipient’s immigration status changes.



Complete Q29 before continuing to read .

Universal Child Care Benefit The Universal Child Care Benefit (UCCB), a benefit of $100 per month for each child under the age of 6 years, is paid to the parents for the purposes of reducing child care costs (although there is no requirement that it actually be spent on child care). The UCCB is taxable but must be reported by the lower net income spouse or common-law partner. The income will be reported to the recipient in box 10 of form RC62 (shown in the TTS Reference Book). The spouse with the lower net income (before reporting the UCCB received) should report the amount on line 117 of their T1 return. When the taxpayer’s spouse or common-law partner is reporting UCCB benefits, enter the amount of the UCCB included in the spouse’s or common-law partner’s net income in the “Information about your spouse or common-law partner” section of the heading of the tax return. For the purposes of the GST Credit or the Child Tax Benefit, the family net income excludes the UCCB received. The UCCB is paid on the 20th of each month, the same date as the Child Tax Benefit. However, it is paid separately. In order to get the UCCB benefit, taxpayers must have registered their child for the Child Tax Benefit. This means that at some time in the past they must have completed Form RC66 Child Tax Benefit Application.

Repayment of UCCB Amounts Taxpayers who reported Universal Child Care Benefits on their 2008 return and subsequently repaid those benefits may claim a deduction on line 213 for the amounts repaid. Just as the UCCB benefits reported do not affect the calculation of the GST Credit and Child Tax Benefits, the deduction for repayment of UCCB benefits do not affect the amount of GSTC or CCTB for the following benefit year.

RC62

2009 General Income Tax and Benefit Guide, pages 15 and 24

Complete Q30 and 31.



Summary In this chapter you learned about dependants, how to claim personal amounts and how to calculate federal non-refundable tax credits. You also learned the rules governing the GST/HST credit and the Canada Child Benefit.


All taxpayers can claim the basic personal amount, regardless of income. Taxpayers who support a spouse or common-law partner may claim the spouse

or common-law partner amount. Taxpayers who do not have a spouse or common-law partner for at least part of

the year, and who supported a dependant during that time, may be able to claim the amount for an eligible dependant. This claim is subject to a number of rules, as summarized in the Eligible Dependant Checklist.

Taxpayers who support a dependant who is 18 or over and infirm may be able to claim the infirm dependant amount.

Taxpayers may be able to claim the child amount for each child born in 1992 or later who lives with them.

Taxpayers who maintain a home in which they live with a dependant relative who is over 18 and infirm, or a parent or grandparent over 65, may be able to claim the caregiver amount.

Most personal amounts for dependants are reduced by the amount of the dependant’s income in excess of the specified threshold.

Taxpayers who use public transit may be able to claim the cost of such transit if they purchase the equivalent of monthly passes. Parents may claim the amount paid for children who are under the age of 19 at any time in the year.

Taxpayers may claim the cost of enrolling their children in an eligible sports or fitness program.

Federal non-refundable credits are calculated on Schedule 1, and are equal to 15% of the amounts claimed on Lines 300 to 335 (including lines 363 and 369), plus Line 349.

The GST/HST credit is applied for on page 1 of the tax return. The amount of the credit is based on the net income (excluding UCCB) of the taxpayer and his/her spouse or partner, and the number of eligible children.

The Canada Child Tax Benefit is not applied for on the tax return, but the amount of the benefit is based on family income (excluding UCCB). Therefore, taxpayers and their spouses/partners must complete tax returns each year in order to continue receiving the benefit. The amount is based on family net income, and the number of eligible children.



Parents of children under the age of 6 years receive a Universal Child Care Benefit (UCCB) of $100 per month per child (under age 6). This benefit is reported in income of the lower net income spouse but is not included in income for GST or CCTB purposes.

UCCB amounts received and previously reported in income that were repaid in the tax year may be deducted on line 213. Amounts repaid do not affect the calculation of net income for GST or CCTB purposes.



Chapter 5 – Calculation of Tax and Credits

Introduction At this point in the course, you have learned about some commonly encountered types of income, deductions and credits, and how to claim amounts for dependants. This chapter explains how to calculate tax.


Calculate the federal political contribution tax credit; Calculate the labour-sponsored funds tax credit; Calculate federal tax by preparing Schedule 1 Federal Tax; Calculate provincial tax (except Quebec) by preparing the provincial Schedule

428 and 479; and Complete the T1 return through “Refund or Balance owing.”

Glossary Before you read this chapter, review the following terms in the glossary: Balance owing; Marginal rate of tax; Refund; and Tax bracket.



Calculation of Tax As you have learned so far, total income is shown at Line 150 of the T1 tax return. It is the sum of all the sources of income required to be reported on the tax return. Net income is calculated next, by subtracting certain deductions from the Line 150 amount. This result is shown at Line 236. Subtracting certain other deductions from net income results in taxable income which is shown at Line 260. This is the figure on which tax is levied, and is the beginning point for the federal tax calculation which is carried out on Schedule 1 Federal Tax. Federal income tax is essentially a percentage of taxable income, but this amount is reduced by the taxpayer’s total federal non-refundable tax credits which you learned how to calculate in Chapter 4. The federal income tax liability is calculated on Schedule 1 and carried to page 4 of the T1. There it is added to other amounts payable to determine the total tax payable. Next the total credits are calculated by adding up the income tax deducted at source, the income tax paid by instalments, as well as a number of refundable tax credits. The total credits are then subtracted from the total payable. If the answer is positive, the taxpayer has a balance owing. If the answer is negative, the taxpayer will receive a refund.


Federal Tax Taxpayers use Schedule 1 Federal Tax (shown in the TTS Reference Book) to calculate their federal tax. Since 2006 there are two versions of Schedule 1, a general version and a special Quebec and non-resident version. This book will focus on the general version.

Federal Non-refundable Tax Credits The first section of Schedule 1 consists of the calculation of a taxpayer’s federal non-refundable tax credits, which you learned about in Chapter 4. To review, the sum of the non-refundable credits in Lines 300 to 332 plus Lines 363 to 369 is multiplied by 15% and the result is entered on Line 338. Line 349 is added to this figure to give a total for Line 350. This amount is carried to Line 40 on page 2 of Schedule 1.

100 Chapter 5 – Calculation of Tax and Credits


Federal Tax on Taxable Income At the top of the second page of the form (Line 29) taxpayers simply enter their taxable income from Line 260 of the T1 return. Next, taxpayers must complete one of four columns, depending on whether their taxable income is $40,726 or less; more than $40,726 but not more than $81,452; more than $81,452 but not more than $126,264, or more than $126,264. These four ranges of income are sometimes called “tax brackets” because each applies progressively higher rates of tax to calculate federal tax. The first column, for taxpayers with incomes of $40,726 or less, levies tax at a rate of 15%. This is accomplished by simply entering the income and multiplying by 15%. The second column, for taxpayers with incomes over $40,726 but not more than $81,452, levies tax at a rate of 15% on the first $40,726 (for a total of $6,109), and at a rate of 22% on the balance. This is accomplished by subtracting $40,726 from the total income, multiplying the result by 22%, and then adding $6,109. The third column, for taxpayers with incomes over $81,452 levies tax at a rate of 15% on the first $40,726 (for a total of $6,109), at a rate of 22% on the next $40,726 (for a total of $8,960), and at a rate of 26% on the next balance. This is achieved by subtracting $81,452 from the total income, multiplying the result by 26%, then adding $15,069 ($6,109 plus $8,960) to find the total. The fourth column, for taxpayers with incomes over $126,264 levies tax at a rate of 15% on the first $40,726 (for a total of $6,109), 22% on the next $40,726 (for a total of $8,960), 26% on the next $44,812 (for a total of $11,651), and 29% for income in excess of $126,264. This is achieved by subtracting $126,264 from the total income, multiplying the result by 29% and adding $26,720 ($6,109 plus $8,960 plus $11,651) to find the total.

Illustration 5.1

Brad has a taxable income of $54,000 (as indicated on Line 260 of his return). The first section of page 2 of Brad’s Schedule 1 Federal Tax Calculation is shown below.



Net Federal Tax Net federal tax is calculated in the second section of page 2 of Schedule 1. The calculation begins with the total tax on Line 36. Various additions and deductions are made to this amount to finally arrive at the net federal tax which is carried back to Line 420 of the T1. The most common of these deductions (tax credits) are discussed in this course. One of them, Line 350, has already been discussed, and two others are discussed below. Another one will be discussed in Chapter 6. Regardless of the number of credits involved, the calculation is carried out by simply following the form and adding and subtracting the various amounts where indicated.

Federal Political Contribution Tax Credit Taxpayers may claim a federal tax credit for political contributions made during the year to registered federal political parties or to federal election candidates. The contributions must be made by cash, cheque, money order, or other negotiable instrument; contributions of goods or services do not qualify. A claim for the credit must be supported by official receipts. The CRA allows a contribution made by either spouse or common-law partner to be claimed by the other. The credit is equal to 75% of the first $400, plus 50% of the next $350, plus 33.33% of the remainder, to a total maximum credit of $650. This means that the maximum credit is reached when contributions total $1,275. Note that this credit is deductible only to the extent of the federal tax payable in the year the contribution is made. Any amount not needed to reduce tax to zero is lost; it may not be used to create a negative federal tax nor may it be carried forward to another year. You may calculate the amount of the credit manually, or use the chart in the Federal Worksheet. Then enter the total contribution on Line 409 and the allowable tax credit on Line 410 of Schedule 1. The contribution amount used in the credit calculation is limited to the excess of the amount contributed over the advantage received for making the contribution. The official receipts should indicate the amount eligible for the credit.

Illustration 5.2

Brad contributed $790 to the federal Tory party and has an official receipt for the donation. His allowable credit for the contribution is $488.33, as calculated below: 75% of first $400 $300.00 50% of next $350 175.00 33.33% of remaining $40 Total credit $488.33

13.33

Brad will enter $790 on Line 409 and $488.33 on Line 410 as shown in Illustration 5.3.




Labour-Sponsored Funds Tax Credit For 2009 returns, this credit is available to taxpayers who are the first registered holders of newly issued approved shares of prescribed labour-sponsored venture capital corporations (LSVCCs) acquired from January 1, 2009, to March 1, 2010. LSVCCs are venture capital corporations sponsored by labour groups, such as the Canadian Federation of Labour, who use the money to invest in small and medium-sized businesses. The maximum federal credit for 2009 is 15% of the cost of shares, to a maximum of $750. The net cost of the shares is entered on Line 413 and the calculated claim on Line 414. To support the claim, a T5006 information slip or an official provincial slip must be filed with the return. Many provinces provide matching provincial credits for provincially sponsored funds. Your instructor will provide the necessary details for calculating the provincial credit, if applicable to your province, which is claimed on the provincial tax form.

Illustration 5.3

Brad purchased $1,000 worth of LSVCC shares. His federal labour-sponsored funds tax credit is $150, calculated as 15% of $1,000. He will enter the net cost of $1,000 on Line 413, and the allowable credit on Line 414. Page 2 of Brad’s Schedule 1 is shown below. Study it to see how the two tax credits have been entered, and how the calculation is carried out. Brad will carry $6,258.79 to Line 420 of page 4 of his T1.





Provincial Tax Provincial or territorial tax and credits (except in Québec) are calculated on provincial Forms 428 and 479, and carried to page 4 of the T1, where they form part of the total refund or balance due. The calculation of Québec provincial tax is made on a separate provincial income tax return which is submitted to the Québec government. The calculation of provincial tax is covered in the provincial supplement provided as part of your course materials.


Refund or Balance Owing Page 4 of the T1 return is used to calculate a taxpayer’s refund or balance owing to the CRA. It involves: entry of net federal tax; entry of provincial/territorial tax (except in Québec); calculation of the total tax payable by the taxpayer; calculation of the taxpayer’s total refundable credits; and determination of the taxpayer’s refund or balance owing. Refer to the page 4 of the T1 General shown in Illustration 5.4 as you read the remainder of this section.

Calculation of Total Payable An individual’s total tax payable for the year is the sum of: the net federal tax, carried from Line 55 of Schedule 1; any Canada Pension Plan contribution required on self-employed earnings (not

discussed in this course); any repayment of social benefits (discussed in Chapter 7); and the net provincial or territorial tax (except in Québec).

Calculation of Total Credits The second part of page 4 of the T1 return is used to calculate the taxpayer’s total credits, including any tax deducted at source and various other refundable credits to which the taxpayer is entitled. The ones covered in this course are explained below:



Total Income Tax Deducted The total of all the tax deducted on all the taxpayer’s information slips is entered on Line 437. If a taxpayer had Québec provincial tax withheld on any income, but is a resident of another province on December 31, add any Québec provincial income tax shown on provincial information slips (e.g., RL-1, RL-2, T4E(Q), etc.) to the total tax on Line 437. This enables the Québec provincial tax paid to be credited against the federal and provincial taxes payable as a result of the move to another province. Note that Line 437 is for Canadian tax only. If a taxpayer has foreign information slips (e.g., a US W-2) showing tax deducted by a foreign government, the amounts may not be added to the amount on Line 437. Instead, foreign tax paid may be eligible for a foreign tax credit or deduction (not discussed in this course).


Canada Pension Plan Overpayment The amount of overpayment of employee contributions to the CPP, as calculated on the CRA Form T2204, is entered on Line 448. You studied this calculation in Chapter 3.

Employment Insurance Overpayment The amount of overpayment of employment insurance premiums, as calculated on the CRA Form T2204, is entered on Line 450. You studied this calculation in Chapter 3.

Refundable Medical Expense Supplement Low-income taxpayers with high medical expenses may be eligible for this credit on Line 452. It is discussed in Chapter 8.

Working Income Tax Benefit (WITB) Low income working taxpayers may be eligible for this credit by completing Schedule 6 and entering the amount on Line 453. It is discussed in Chapter 7.

Employee and Partner GST/HST Rebate The Employee and Partner GST/HST rebate is available to certain taxpayers who have claimed expenses as employees (on Line 229) or as general partners (on Lines 135 – 143), and to taxpayers who have deducted some kinds of professional dues on Line 212. The rebate is calculated on Form GST370, and claimed as a refundable credit Line 457. This credit is discussed in H&R Block — Employment Expenses, which you may be taking as an optional segment of this course.



Never enter on this line the GST/HST credit you may have applied for on page 1 of the return.

Tax Paid by Instalments Some taxpayers, such as self-employed persons and those living off investment income do not have tax withheld at source on their earnings. The CRA requires many of these taxpayers to pay their estimated tax for the year in instalments. Such payments are claimed on Line 476. Instalments are discussed in more detail in a later chapter.

Provincial or Territorial Credits Outside Québec, any provincial or territorial tax credits are claimed on Line 479.

Refund or Balance Due Subtract the total credits (Line 482) from the total payable (Line 435). If the amount is negative, the taxpayer has a refund, and the amount should be carried to Line 484 (refund). If the amount is positive, the taxpayer has a balance owing to the government, and the amount should be carried to Line 485 (balance owing). If the return has a balance owing, and the taxpayer is sending a cheque in with the paper filed return, enter the remittance in Box 486. If the return is being electronically filed the taxpayer has several methods available to pay the balance owing. Starting in 2010 CRA has created a new service whereby taxpayers can make payments online directly through the CRA Web site. Note that the balance owing need not be sent in with the return, especially if the taxpayer is filing early. Some people prefer to wait for the CRA’s assessment before paying the amount due. However, if the amount due is not paid by April 30, interest will be charged. Note that because of the penalty for late filing, it is always better to file a balance-due return on time, even if the payment will be late, than to put off filing the return because money is scarce.


Professional Tax Preparers Any person or business receiving compensation for the preparation of the tax return must complete Box 490.

Direct Deposit Near the bottom of page four of the T1 General, taxpayers may request that their income tax refunds, GST/HST credit cheques and WITB advance payments be deposited directly into their bank accounts. To have Child Tax Benefit payments deposited into the same account, simply tick Box 463. To have Universal Child Tax Benefit payments deposited to the same account, tick Box 491.



The account to which the funds are deposited must be a Canadian funds account at a bank, trust company, credit union, or other financial institution in Canada. To start direct deposit (or to change bank information previously provided to the CRA) the taxpayer may either attach a voided personalized cheque to the tax return, or provide the banking information requested. Direct deposit is optional, but once it has been chosen it will continue until cancelled. Taxpayers who have requested direct deposit will continue to receive notices (of assessment, etc.) by mail. For taxpayers who do not choose direct deposit, the CRA will issue cheques as in the past. To stop direct deposit, or to have Child Tax Benefit or Universal Child Care Benefit payments deposited in a different account, the taxpayer must complete a T1 – DD(1) “Direct Deposit Request – Individuals” and either include it with the paper return or mail it separately to the tax office.



Illustration 5.4

Brad’s provincial tax is $3,437.46, and his employer deducted $10,000 in tax. Page 4 of Brad’s return is shown below.


Complete Q11 and Q13



Summary In this chapter you learned how to calculate two tax credits, how to calculate federal tax, and how to complete page 4 of the T1.


Federal tax is calculated as a percentage of taxable income. There are four federal “tax brackets” or income levels, and a different tax rate is

applied to each level. The federal tax rate is progressive, and applies higher rates of tax to higher

income levels. The federal tax rates for 2009 are 15%, 22%, 26% and 29%. A tax credit may be claimed for federal political contributions at the rate of 75%

for the first $400, 50% of the next $350, and 33.33% of the remainder, to a maximum credit of $650.

A tax credit may be claimed for the purchase of shares of labour-sponsored venture capital corporations. The federal credit is equal to 15% of the cost of the shares, to a maximum credit of $750. Some shares are eligible for a provincial tax credit as well.

Tax refunds, as well as GST/HST credits, WITB advance payments, Canada Child Tax Benefit payments, and Universal Child Care Benefit payments can be directly deposited to a taxpayer’s bank account. Taxpayers can start or change direct deposit by completing the direct deposit information on the tax return. To stop direct deposit, they must contact their local tax services office.



Chapter 6 – Investment Income

Introduction In this chapter and the ones that follow, we consider additional kinds of income and deductions that pertain to many taxpayers. This chapter focuses on dividends from taxable Canadian corporations, interest and other investment income, simple capital gains, and carrying charges and interest expenses.


Report dividends from taxable Canadian corporation; Report different types of interest and other investment income from Canadian

and foreign sources; Report capital gains from information slips; Apply the attribution rules; Deduct allowable investment carrying charges and interest expenses; Complete Schedule 4 Statement of Investment Income and transfer the totals to

the appropriate lines of the T1 return; and Complete Schedule 3 Capital Gains (or Losses) and transfer the taxable capital

gains to the T1 return.

110 Chapter 6 – Investment Income


Glossary Before you read this chapter, review the following terms in the glossary: Annual accrual method; Attribution rules; Bonds; Canadian securities; Capital gain; Capital loss; Capital property; Carrying charges; Dividend; Dividend gross-up; Dividend tax credit; Eligible Dividend; Mutual fund trust; Stock dividend; Triennial accrual method; Trust; and Trustee.



Schedule 4 and Schedule 3 Dividends, interest, and other investment income must be itemized and totalled on Schedule 4 Statement of Investment Income. Schedule 4 is also used to report partnership income or loss for limited and non-active partners, carrying charges and interest expenses, exploration and development expenses, and depletion allowances. The totals shown on this schedule are then carried to the appropriate lines of the T1 return. Schedule 3 Capital Gains (or Losses) is used to calculate capital gains or losses. The taxable capital gain is then carried to Line 127 of the T1 return.

Schedule 4

Schedule 3

Dividends from Taxable Canadian Corporations When a corporation distributes a portion of its after-tax profits to its shareholders, that distribution is called a dividend. If the dividend is from a taxable Canadian corporation, it is subject to special tax treatment to ensure that the shareholder receives credit for the tax already paid by the corporation. The mechanism used is to “gross-up” the actual dividends received to arrive at the “taxable amount” which is reported in section I of Schedule 4. As a result, taxpayers report more income than they actually receive, but this is offset by the federal dividend tax credit which is deducted from federal tax payable on Schedule 1. Additionally, there is a provincial dividend tax credit that is deducted from provincial tax. When the provincial tax saving is factored in, the overall credit to the individual is approximately equal to the corporate taxes already paid. Because smaller corporations can claim the small business deduction on their tax returns, the rate of corporate tax paid by smaller corporations is less than the rate of tax paid by larger corporations which cannot claim the deduction. In order to make the taxes paid by the investor on the dividends received match the taxes paid by the corporation, dividends from taxable Canadian corporations are either classed as eligible dividends or other than eligible dividends. Each of these types has a different gross-up factor and a different dividend tax credit rate. Dividends from larger corporations (those not able to claim the small business deduction) are called eligible dividends. The dividend gross-up rate for these corporations is 45% and the dividend tax credit rate is 27.5% of the actual amount of the dividends received by the taxpayer. Dividends issued by corporations that can claim the small business deduction are called other than eligible dividends and are grossed up by 25% and the dividend tax credit rate is 16 2/3% of the actual amount of the dividends received by the taxpayer.



Illustration 6.1

The Canadian Dividend Gross-up/Tax Credit Mechanism Eligible Dividends Corporation X has a profit of $100 $100.00 Corporation X is taxed on its profits at 32% (federal and provincial) The amount available for distribution to the shareholder is $68.00

(32.00)

The shareholder receives the dividend of $68 $68.00 It is grossed up by 45% This amount equals the corporation’s pre-tax profit (approx) $98.60

30.60

The shareholder receives a federal dividend tax credit of 27.5% of $68 $18.70 The shareholder receives a provincial dividend tax credit of 13.5% The total tax credit is the same as the tax paid already by the corporation $32.00

13.30

Because both the corporate tax rate and the provincial dividend tax credit rate vary by province, this result is only approximated in most cases. Other than Eligible Dividends Corporation X has a profit of $100 $100.00 Corporation X is taxed on its profits at 20% (federal and provincial) The amount available for distribution to the shareholder is $80.00

(20.00)

The shareholder receives the dividend of $80 $80.00 It is grossed up by 25% This amount equals the corporation’s pre-tax profit $100.00

20.00

The shareholder receives a federal dividend tax credit of 16 2/3% of $80 $13.33 The shareholder receives a provincial dividend tax credit of 7% The total tax credit is the same as the tax paid already by the corporation $20.33

7.00

Because both the corporate tax rate and the provincial dividend tax credit rate vary by province, this result is only approximated in most cases.

Because of the dividend tax credit, the overall tax on dividends is lower than for most other types of income. Note, however, that dividends from foreign sources are not subject to this special treatment, and a dividend tax credit may not be claimed for them. Because the dividend tax credit rate for eligible dividends exceeds the taxes payable on the (grossed-up) dividend income for taxpayers in the lowest tax bracket, the receipt of dividend income can result in a tax reduction rather than an increase in taxes payable. For example, if a taxpayer in the lowest tax bracket were to receive $1,000 in eligible dividends, the federal tax on that income would be $1,000 x 145% x 15% = $217.50 and the dividend tax credit would be $1,000 x 27.5% = $275.00, resulting in a net tax decrease of $57.50.



Taxable amount of other than eligible dividends are totalled on Line 180 of Schedule 4 and then added to the total of eligible dividends for a final total of all taxable Canadian dividends on Line 120. Both totals from Line 180 and Line 120 on Schedule 4 are then transferred to page 2 of the T1 General.

Dividends Received from Corporations Canadian corporations are required to furnish a T5 slip to shareholders to whom they pay dividends during the year. However, a shareholder who does not receive a T5 slip is still required to report the taxable amount of dividends received, even if the amount is small.

T5 slip

There are six boxes on the T5 slip which contain information about dividends from taxable Canadian corporations: Box 24 “Actual amount of eligible dividends,” Box 25 “Taxable amount of eligible of dividends,” Box 26 “Federal dividend tax credit for eligible dividends,” Box 10 “Actual amount of dividends other than eligible dividends,” Box 11 “Taxable amount of dividends other than eligible dividends,” and Box 12 “Federal dividend tax credit for dividends other than eligible dividends.” Boxes 24 and 10 show the amount actually paid to the shareholder, but Boxes 25 and 11 show the taxable amount that is entered on the return. The taxable amount is calculated by multiplying the actual amount by 1.45 for eligible dividends and 1.25 for other than eligible dividends. This increases taxable income but, in return, the shareholder is allowed a federal dividend tax credit on Line 425 of Schedule 1 and a provincial dividend tax credit on the provincial form. The net result is that the shareholder receives a credit that approximates the tax the corporation has already paid on the dividend, as shown in Illustration 6.1 above. A shareholder who receives dividends but has not received an information slip must manually calculate the taxable amount to enter on Schedule 4. This is done by multiplying the actual amount by 1.45 if the dividends are eligible dividends or 1.25 if they are not. It is good practice to show, in parentheses, the actual amount of dividends received beside the name of the payer. Then, when the completed return is checked for accuracy, it is easy to verify that the amount entered as taxable dividends has been grossed up properly.

Dividends Allocated from an Employees’ Profit Sharing Plan (EPSP) An employees’ profit sharing plan is an arrangement whereby an employer pays a portion of profits to a trustee to be held and invested for the benefit of employees who are members of the plan.



The trustee of the plan furnishes the employees with T4PS slips showing the taxable amounts allocated to them for the year. For eligible dividends, the actual and taxable amounts of dividends from an EPSP are reported in Boxes 30 and 31, respectively, and the federal dividend tax credit in Box 32. For other than eligible dividends, the actual and taxable amounts of dividends from an EPSP are reported in Boxes 24 and 25, respectively, and the federal dividend tax credit in Box 26.

T4PS slip

Dividends Allocated by Trusts and Estates Trusts and estates that receive dividends from taxable Canadian corporations report amounts allocated to beneficiaries on a T3 slip. For eligible dividends, the actual and taxable amounts of dividends are reported in Boxes 49 and 50, respectively, and the federal dividend tax credit in Box 51. For other than eligible dividends, the actual and taxable amounts of dividends are reported in Boxes 23 and 32, respectively, and the federal dividend tax credit in Box 39.

T3 slip

Dividends Not Paid in Cash Corporations do not always pay dividends in cash. Sometimes a corporation will pay a dividend by issuing the taxpayer more shares. These are called stock dividends and are treated the same as other dividends. The T5 reporting this kind of transaction will show the fair market value of the shares in Box 24 if the dividends are eligible dividends for Box 10 if they are not.. Study Illustration 6.2 which shows how to report dividend income from several different sources.



Illustration 6.2

Goldie Baum received dividend income from Bell Canada (see T5 and T4PS sections below) and from Towers Trust (see T3 section below). The dividends are reported in Section I of Schedule 4 Statement of Investment Income (shown below). The taxable amount of dividends from taxable Canadian corporations ($1,160 in this example) is entered on Line 120 of the T1 General.




Election to Include Spouse’s or Common-law Partner’s Dividends in Income A person with very low income may not be able to benefit from the dividend tax credit. In this case, it may be advantageous to transfer dividend income to someone who can benefit from the credit. The Income Tax Act allows low-income spouses or common-law partners to elect to transfer their taxable dividends to a spouse or common-law partner if doing so increases the spouse or common-law partner amount that can be claimed. If the election is made, the transferee may claim the dividend tax credit, but none of the related interest charges or other carrying charges (discussed later in this chapter) paid by the spouse or common-law partner to earn the income. If the election is made, all of the spouse’s or common-law partner’s dividends from taxable Canadian corporations must be transferred. The election is advantageous if the increased spouse or common-law partner amount and dividend tax credit are sufficient to offset the higher taxes on the included income. Note that care should be exercised, as it is not always advantageous.

Illustration 6.3

Robert is in 15% federal tax bracket. His wife, Leila, has a taxable income of $3,450, including $1,000 of actual ($1,450 taxable) eligible dividends. If Robert elects to include Leila’s dividend on his own return, it will result in a federal tax saving of $275, as calculated below. Federal tax credit resulting from the additional spouse or common-law partner amount being claimed $217.50 Additional federal dividend tax credit 275.00 Additional federal tax resulting from the election Total federal tax saving $275.00

(217.50)

If the taxpayer’s spouse or common-law partner amount is being increased by less than the amount of dividends being included in income (that is the spouse or common-law partner has other income), it could actually be detrimental to make this election if the taxpayer is in the highest tax brackets. The effect on provincial tax must also be considered.





Interest and Other Investment Income Section II of Schedule 4 is used to summarize the various amounts of interest and other investment income a taxpayer receives. The taxpayer’s interest income is itemized and the sources identified. If more lines are needed, a statement should be attached. The amounts are then totalled and transferred to Line 121 of the T1. Interest earned on investments made after 1989 must be reported annually, regardless of when or how often the interest is actually paid.

Interest from Trust, Bank, or Other Deposits If money is in a short-term investment that makes payments at least annually, the income reported yearly is the amount paid. This applies to investments such as savings accounts and term deposits of one year or less. Banks, credit unions, and similar organizations that pay or credit a taxpayer with interest are required to issue a T5 slip showing the interest income in Box 13 if the amount paid or accrued is $50 or more. However, the taxpayer must report all interest received, no matter how little, even if an information slip is not issued. In the case of a joint savings account held by a taxpayer and spouse or common-law partner, the name or names shown on the T5 slip are irrelevant for tax purposes. In such cases, the rule is that the interest on deposits is taxable to the person from whose income the deposits originated. If both spouses or common-law partners contribute to an account, the interest income must be divided between them in proportion to their shares of the total deposited. The interest split should be indicated both on the particular T5 and on the Schedule 4.

Illustration 6.4

Chico and Juanita are married and have a joint account at the Royal Bank. All the funds are deposited from Chico’s income. The T5 issued by the bank shows both names. Because the money on which the interest was paid was earned by Chico, he must report the interest on his own return even though the T5 shows his wife’s name as well as his own. The T5 is attached to Chico’s return.

Illustration 6.5

Karl and Mercedes are married and have a joint account at the Bank of Montreal. The total deposit is $8,000, of which Karl deposited $6,000 from his earnings and Mercedes $2,000 from hers. Their T5 slip shows $400 interest. Karl must report $300, calculated as: ($6,000 / $8,000) x $400 Mercedes must report $100, calculated as: ($2,000 / $8,000) x $400



Long-Term Investment Contracts If money is invested in a long-term contract that does not make annual payments, the interest must still be reported annually. In this case the interest is reported as it accrues. The amount reported each year is the interest accrued to the anniversary date of the investment contract, not the interest accrued during the calendar year. For example, the anniversary date of an investment contract purchased on July 1, 2008, is June 30, 2009, and the interest accrued to that date is the amount to be reported on the 2009 tax return. Issuers of long-term contracts should report the interest accrued each year on a T5 slip.

Other Interest Income In addition to interest from bank deposits and long-term investment contracts, all of the following kinds of interest and other investment income must be reported in Section II of Schedule 4, even though many are not reported on a slip: interest on any income tax refund received by a taxpayer during the year, as

shown on the Notice of Assessment; interest from private mortgages, notes, and other securities; interest from bank or other deposits not reported on an information slip because

the amount is under $50; interest payments from insurance companies on accumulated dividends; royalties received by an individual for the use by others of property such as a

patent, copyright, or trademark, usually reported in Box 17 of a T5 slip (however, if the royalties are from a work or invention, the amount should be reported on Line 104 as explained in Chapter 2); and

“Other income from Canadian sources” shown in Box 14 of a T5 slip.

Investments Made Before 1990 Interest income from investments made before 1990 are subject to different rules than more recent investments. For pre-1990 investments, accrued interest may be reported either triennially or annually, as explained below: Under the triennial method, the accrued interest on pre-1990 investment

contracts is reported every third year (“triennially”) after December 31 of the year in which it was issued. This date is commonly referred to as the investment contract’s “third anniversary.” For example, the third anniversaries of an investment contract purchased on June 1, 1988, are December 31 of 1991, 1994, 1997, 2000, 2003, 2006 and 2009. The interest accrued to those dates is the amount required to be reported on the taxpayer’s 1991, 1994, 1997, 2000, 2003, 2006 and 2009 returns, respectively.

Special rules apply to investments made before November 13, 1981. Such contracts are deemed to have been made on December 31, 1988, which means that the “third anniversaries” for all such contracts occurred on December 31 of 1991, 1994, 1997, 2000, 2003, 2006 and 2009. The accrued interest to those dates is the amount required to be reported on the 1991, 1994, 1997, 2000, 2003, 2006 and 2009 returns, respectively.



Under the annual method, the accrued interest is reported yearly. The interest reported is the amount accrued during the calendar year.

Record Keeping T5 slips are issued for most pre-1990 investments on each third anniversary, or when the contract matures or is disposed of. Taxpayers using the triennial accrual method simply report the amounts on their T5 slips. Those who are reporting interest annually, however, should maintain a record of the interest declared to date, so that the amounts shown on their T5 slips can be reduced by the interest income already declared.

Change of Method Taxpayers may use different reporting methods for different pre-1990 investments, as long as the method used for each is followed consistently from year to year. The CRA allows a taxpayer to change to the annual accrual method of reporting at any time, if he or she wishes to do so, by filing a signed statement to this effect with the tax return. This election allows the taxpayer to avoid including a large amount of interest income all in one year by spreading it out in yearly increments. Once a taxpayer elects to use the annual accrual method for a particular investment, that method must be used to report all future interest from it. The taxpayer is not permitted to change to another method.


Canada Savings Bonds Canada Savings Bonds (CSBs) are a popular investment for Canadians. They offer security and liquidity and, because they can be purchased in small denominations, they are ideal for investors with little cash to invest. CSBs are offered in two forms: regular interest (“R”) bonds; and compound interest (“C”) bonds.

Regular Interest Bonds Holders of “R” bonds receive interest once each year. The interest is either sent to the taxpayer directly, or paid into an account, and must be reported on a yearly basis. A T5 slip indicating the amount of interest paid is sent to the taxpayer each year.

Compound Interest Bonds Individuals who hold “C” bonds do not receive any interest until the bond is cashed. In the meantime, the interest portion is reinvested each year so that the interest the bondholder earns is compounded. Interest on compound interest bonds must be reported annually. The amount to be reported is shown on a T5 slip, which is sent to the taxpayer each year.



Interest on Treasury Bills Treasury Bills (often referred to as “T-bills”) are government-issued debt obligations, usually with a 90-day maturity period. Because they can be purchased only in high denominations, they offer a better than average rate of interest. T-bills are generally available in units of $100,000, but it is possible to invest smaller amounts in T-bills through a bank or a brokerage, which can combine the cash from several investors. Investors purchase T-bills for less than their face value and redeem them for their full value on the maturity date. The difference, commonly referred to as the discount, must be reported as interest. For example, if an investment of $24,688 paid $25,000 at maturity, the difference, $312, would be reported as interest. The proceeds of disposition of a treasury bill are reported in Box 21 of Form T5008. As well as the name, address, and SIN of the taxpayer, the form gives a description of the security and the date and proceeds of disposition. It may also show the cost of acquisition in Box 20.

T5008 slip

Note that Form T5008 does not show the amount to be included in the taxpayer’s income. This amount must be calculated by subtracting the cost of acquisition from the proceeds of disposition. If the cost is not shown on the T5008, it must be obtained elsewhere (e.g., from an accompanying statement from the investment company or broker). The T5008 slip is also used to report other securities transactions. In almost every case, with the exception of T-bills, dispositions shown on a T5008 slip will be treated as capital dispositions, as discussed later in this chapter.



Illustration 6.6

Goldie Baum invested $24,688 in a T-Bill on March 7. She received $25,000 on June 6 when it matured. The amount to include in income is $312, calculated as $25,000 – $24,688. Goldie’s transaction is shown on the T5008 below.

Foreign Investment Income Foreign-source investment income is also reported in Section II of Schedule 4. The items to be reported here include the following: foreign income reported in Box 15 of a T5 slip; foreign income reported in Box 25 of a T3 slip; dividends received from foreign corporations; and any other interest or investment income from foreign sources. Note that foreign income must be reported in Canadian dollars. Therefore, if foreign currency was received, it must be converted using the conversion rate in effect at the time the income was received or, if periodic income was received, using the average conversion rate for the year.



Illustration 6.7

Goldie Baum received interest income from the Royal Bank, as shown on the T5 section below.

She also received mortgage interest of $2,228.20, and a dividend of $50US from Bank of America ($53.30 in Canadian funds). These amounts, as well as the interest from her T-Bill transaction (from Illustration 6.6), are shown in Section II of her Schedule 4, as shown below. The amount of $2,668.50.will be carried to Line 121 of her return.



Capital Gains Capital property is all property of lasting value, except the trading assets of a business (that is, property held by a business for resale). A taxpayer who sells or otherwise disposes of capital property may realize a capital gain or incur a capital loss. A capital gain occurs when a taxpayer sells an asset for more than its cost. A capital loss occurs when an asset is sold for less than its cost. Capital gains are discussed in more detail in H&R Block – Capital Gains I, which you may be taking as an optional segment of this course. In this course we will deal only with capital gains as reported on information slips. Such gains are commonly reported in Box 21 of a T3 slip or Box 18 of a T5 slip. Capital dispositions may also be reported on a T5008 slip as discussed earlier in this chapter. However, the information provided on the slips is seldom sufficient to calculate the taxpayer’s capital gain or loss on the disposition. Additional information required may include:



Additional costs associated with the acquisition of the securities. Any adjustments to the cost base of the securities after they were acquired. The details of acquisitions and dispositions of identical properties owned by the

taxpayer. Costs associated with the disposition of the securities. Details of calculating capital gains are discussed in more detail in H&R Block – Capital Gains I.

Mutual Funds Mutual funds are the most common source of capital gains reported on information slips. A mutual fund is often set up as a trust, and allows individual investors with limited time, capital, and expertise to pool their resources to acquire “units” in a diversified portfolio that is managed by professionals. The value of the mutual fund unit is generally equal to the fair market value of all the cash and securities held by the fund, divided by the number of units. The units increase or decrease in value with the increase or decrease in the value of the underlying securities. If a taxpayer sells units of a fund, the difference between the unit price at the time of purchase and the time of redemption is reported as a capital gain or loss on Schedule 3. This type of capital gain or loss is not covered in this course. However, it is possible for capital gains or losses to accrue even if a taxpayer has not sold any mutual fund units. This is because fund managers regularly buy and sell securities held within the fund itself. Depending on whether the securities are sold for more or less than their cost, this results in capital gains or losses to the fund. Because a mutual fund is a trust, this income retains its identity when distributed to the individual investors. Thus capital gains earned by the trust flow through to the individual investors and are reported as such in Box 21 of a T3 slip. These capital gains are then reported by the investors on Line 176 of Schedule 3. Capital gains receive favourable tax treatment because only 50% of a capital gain is taxable. To achieve this, the total capital gain reported on Schedule 3 is multiplied by 50% to determine the taxable capital gain. The taxable capital gain is then transferred to Line 127 and included in taxable income. Securities held by a mutual fund may also pay dividends or interest. These, too, flow through to the investors and are reported in the appropriate boxes of the T3, but must be reported on Schedule 4.



Illustration 6.8

Maxine owns 1,000 units of Quickbuck Mutual Funds. She received a distribution of income from the fund as reported on the T3 slip reproduced below.

Maxine reports the capital gains on Schedule 3, the relevant portion of which is shown below. Note how the gains are multiplied by 50% to find the taxable amount.

The taxable amount of capital gains ($190) is transferred to Line 127 of the T1. The taxable amount of dividends shown on the T3 are reported on Schedule 4, as described earlier in the chapter, then transferred to Line 120.

Many funds allow investors to take their share of the income in the form of additional units in the fund instead of in cash. In this case, the cost of the new units should be recorded each year so that the correct capital gain can be calculated when the fund units are ultimately sold. Investors who roll over income into units instead of taking it in cash are advised to keep very careful records; otherwise they risk reporting more capital gains than necessary when they sell their fund units.


Attribution Rules Up to this point we have discussed how and when to report investment income; in this section we discuss who should report it. Unlike employment income, investment income is not always reported by the person who earned it. The reason for this is that employment income is earned by investing one’s own time, skill and expertise in the service of another. Investment income, however, is earned by investing capital. Taxpayers in high tax brackets quickly realized that it would be advantageous to transfer capital to lower-income family members to invest



so that it would be taxed at a lower rate. Not surprisingly, the government responded by enacting rules to prevent loss of revenue due to such tactics. As a result, the Income Tax Act now contains a comprehensive set of rules that limit the ability of taxpayers to reduce taxes by splitting their income among family members. These are called attribution rules because their effect is to “attribute” the income from transferred property back to the transferor. The attribution rules apply to property (which in this context includes money) transferred by gift, sale, loan, or otherwise to a spouse or common-law partner or to a person under the age of 18 with whom the taxpayer does not deal at arm’s length (e.g., child, grandchild, niece, etc.). Any interest or other income from the transferred property is considered to be the income of the transferor. If the property consists of shares, then any dividends earned must be reported on the transferor’s return in accordance with the usual gross-up/dividend tax credit provisions. The attribution rules do not apply to transfers of property if fair market value consideration is paid for the property. However, if the transferor lends money to the transferee to enable him or her to buy the property, the attribution rules still apply unless the loan bears interest at the prescribed rate or at a commercial rate, and the interest is paid within 30 days of the year end. Note that the attribution rules do not apply to income earned by the accumulated earnings of transferred property.

Illustration 6.9

Tom gave his wife, Tina, $10,000. Tina bought shares that paid dividends of $400. Since the $10,000 was transferred as a gift, the $400 in dividends is attributed back to Tom, as are any future earnings on the original $10,000. However, if Tina invests the $400 of accumulated earnings, any money earned on this investment is Tina’s income, not Tom’s. By continuing to invest the accumulated earnings, Tina can eventually build up her own source of investment earnings.

The specific rules governing property transferred to a spouse or common-law partner or minor children are discussed in more detail below.

Transfers of Property to a Spouse or Common-law Partner A “spouse or common-law partner,” for the purpose of the attribution rules, includes a person who becomes the taxpayer’s spouse or common-law partner subsequent to the transfer being made. However, income is only attributed back to the transferor during the period in which they are considered to be spouses or common-law partners. This means that the attribution begins when they get married or enter a common-law relationship, and ends when one spouse or common-law partner dies or the couple separates due to a breakdown of the relationship. The attribution rules apply to capital gains or losses arising from the disposition of transferred property, as well as to interest or dividend income. However, capital gains or losses are not



attributed back to the transferor if the spousal or common-law partner relationship no longer exists at the time of the disposition.

Illustration 6.10

Clyde and Mabel have been married for years. Last year, to split their income, Clyde transferred his IBM shares to Mabel so that she could report the income from them instead of him. As long as Clyde and Mabel are spouses, any income earned by the shares must still be reported by Clyde on his return. He must also report any capital gain if the shares are sold. However, if Clyde and Mabel separate because of a breakdown in the relationship, the attribution rules would cease to apply. In this case, Mabel would report the income on her own return.

Transfers of Property to Minor Children The transfer of property to a minor is subject to the attribution rules if the minor is under 18 and is a child, grandchild, brother, sister, niece or nephew of the taxpayer. Income earned from property (interest, dividends, etc.) which has been transferred to a minor child is attributed back to the transferor up to (but not including) the year in which the child reaches the age of 18. The attribution rules, however, do not apply to capital gains or losses from such property, regardless of age. Thus, if a child disposes of transferred property, the resulting capital gain or loss is not attributed back to the transferor.

Illustration 6.11

Last year, Klaus gave a Canada Savings Bond to his niece Ruth, for her 16th birthday. This year, the attribution rules require Klaus to report the interest on the bond, since Ruth is only 17 years old. Next year, when Ruth turns 18, the attribution rules no longer apply. Ruth, therefore, will report the interest from then on.

Interest on Canada Child Tax Benefit and/or Universal Child Care Benefit Payments

Income arising from investment of Canada Child Tax Benefit or Universal Child Care Benefit payments is considered income of the child if the payments are deposited into an account for the child’s benefit. In this situation, the attribution rules do not apply. As mentioned in the final section of Chapter 5, a separate bank account can be chosen for the direct deposit of Canada Child Tax Benefit and Universal Child Care payments. This option allows for easy identification of the income.




Carrying Charges and Interest Expenses Many expenses related to earning investment income are deductible. Such investment expenses, including carrying charges and interest expenses, should be itemized in Section IV of Schedule 4. The total is then entered on Line 221 on page 3 of the T1.

Carrying Charges Deductible investment expenses include the following carrying charges: fees paid for the management or safe custody of investments, including amounts

paid to a securities broker if the broker’s principal business includes management and administration, and a separate fee is charged (this does not include broker’s fees or other costs of purchasing stocks and bonds since these are considered part of the purchase price);

safety deposit box charges if the box is used to store securities or other items of an investment nature;

accounting fees for maintaining investment records, including preparation of Schedule 4 for the previous year; and

the full amount of investment counsel fees, but not the cost of subscriptions to investment newspapers and periodicals.

Interest Expenses Interest on money borrowed to earn interest, dividend, and royalty income is deductible as an investment expense. This includes the following: interest paid during the year by an employee who has purchased Canada

Savings Bonds through a payroll deduction plan, where the cost of the bonds is borrowed and repaid, with interest, through payroll deductions;

interest paid on money borrowed to purchase stocks, bonds, and other securities including interest paid to a securities broker unless the purchase is of stock in a corporation that has a stated policy not to pay dividends;

interest on money borrowed to earn investment income from foreign sources; and

interest on money borrowed to acquire an interest in a limited partnership or a partnership in which the taxpayer is not an active partner.

Note that interest paid on money borrowed to contribute to an RRSP is not deductible.



Illustration 6.12

Goldie Baum has the following investment expenses for the year: $150 in interest on money borrowed to earn dividend income; $20 in safety deposit box charges (her safety deposit box is used to store

Canada Savings Bonds); and $100 in investment counsel fees. Goldie’s carrying charges are itemized in Section IV of Schedule 4, shown below.

The total amount to enter on Line 221 of the T1 is $270.


Complete Q17.



Summary In this chapter you learned how to report various types of investment income, and claim related investment expenses.


Dividends from taxable Canadian corporations are grossed up before being added to income. Eligible dividends are grossed up by 45% and other than eligible dividends are grossed up by 25%. The federal tax payable is then reduced by the federal dividend tax credit. For eligible dividends, the credit is 27.5% of the actual amount (approximately 19% of the taxable amount). For other than eligible dividends, the credit is 16 2/3% of the actual amounts (13 1/3% of the taxable amount).

Because of the dividend tax credit, Canadian dividends are generally taxed at a lower rate than most other types of income.

Taxpayers may elect to include their spouse’s or common-law partner’s dividends in income, if the spouse or common-law partner amount is increased as a result.

Interest income must be reported annually, as it accrues, regardless of when it is paid.

Interest on T-bills held to maturity is the difference between the purchase price and the selling price.

A capital gain occurs when an asset is sold for more than its cost (unless the increase in price is directly due to accrued interest).

Only one-half of a capital gain is taxable. Under the attribution rules, interest, dividends, and capital gains on property

transferred to a spouse or common-law partner must be reported by the transferor, unless the couple has separated.

Under the attribution rules, interest and dividends on property transferred to a minor child must be reported by the transferor, up until the year in which the child turns 18.

Certain carrying charges and interest expenses used to earn investment income can be deducted from total income.



Chapter 7 – Social Benefits and Other Amounts

Introduction This chapter deals with a variety of items: social assistance payments, several kinds of social benefits received by taxpayers, and the repayment of such benefits that is required of some taxpayers. Then the tax credit for charitable donations, followed by several deductions that may be claimed on Lines 229, 232, and 256 is discussed along with a number of income items that are reported on Line 130 of the tax return. Finally, the Working Income Tax Benefit a refundable tax credit is discussed. Although most of these items do not have any particular relationship to each other, they are all of importance to a significant number of taxpayers.

At the conclusion of this chapter, you will be able to: Report workers’ compensation payments and social assistance; Report selected Canada Pension Plan benefits; Report employment insurance benefits; Claim a deduction for employment insurance benefits repaid in the taxation

year; Calculate the amount of the “clawback” of EI benefits and report it on the tax

return; Determine what gifts qualify as charitable donations and calculate the related

tax credit; Deduct eligible legal fees on Lines 229 and 232 of the T1; Report “Other income” amounts on Line 130 and eligible deductions on Lines

250 and 256; Determine the eligibility for the Working Income Tax Benefit and how to claim

this refundable tax credit; and Complete Schedule 12 and deduct the Home Renovation Tax Credit.

132 Chapter 7 – Social Benefits and Other Amounts


Glossary Before you read this chapter, review the following terms in the glossary: Canada Pension Plan; and Death benefit. Working Income Tax Benefit



Workers’ Compensation and Social Assistance Workers’ compensation and social assistance are non-taxable forms of income. However, they must be included in net income as they affect eligibility for social benefits and the calculation of certain refundable tax credits. The inclusion in net income is achieved by entering the non-taxable income on Lines 144 and 145 of the tax return. The amounts are then deducted at Line 250 (after the net income line) to ensure they are not included in the Line 260 amounts on which tax is levied. Workers’ compensation payments and social assistance are both reported on T5007 information slips.

T5007 Slip

Workers’ Compensation Payments Workers’ compensation is a form of insurance intended to alleviate the hardship associated with work-related injury, disability, or death. The program is financed by employer contributions and provides for payments to replace lost wages and to defray the costs of medical care and rehabilitation. Workers usually receive benefits directly from the provincial Workers’ Compensation Board (WCB). The amount is shown in Box 10 of a T5007 and is reported on Line 144 with an offsetting deduction on Line 250. Illustration 7.1 follows on next page.

Waiting for a Workers’ Compensation Board Decision If a worker’s WCB claim is not approved immediately, the employer may continue to pay the worker while waiting for the WCB decision. Later, when the claim is approved, the employer will be reimbursed by the WCB. In the meantime, the employer reports the amount paid to the employee on a T4 slip. When the claim is approved (which may be in a subsequent year), the employer reports the amount of the WCB award in Box 77 of the T4 slip. The employee may claim a deduction on Line 229 for this amount. The employee may also receive a T5007 showing the full amount of the award, which is reported on Line 144. A corresponding deduction is then taken on Line 250 of the T1. If the award is received in a later year, the amount in Box 77 may exceed the amount in Box 14 and create a loss in the year it is received. This loss may be treated as a non-capital loss (not discussed in this course).



Illustration 7.1

Andrew Harrison received WCB benefits as shown on the T5007 below. The entries on his return are shown immediately following.

Social Assistance Payments Social assistance is a form of assistance which is paid to needy persons on a means-tested basis. It is intended to provide at least a subsistence level of income to those who have no other appreciable sources of income and no means of providing for themselves because of unemployment, sickness, injury, disability, or other reasons. Social assistance is usually reported by the recipient. However, a special rule exists with regard to social assistance received by a person who is living with a spouse or common-law partner at the time the assistance is received: Social assistance received by a spouse or common-law partner during a time in which the spouses or common-law partners are living together must be reported by the higher-income spouse or common-law partner, regardless of who actually received the income. In all other cases, the income is reported by the person who actually received it. The person who reports the income on Line 145 may take the corresponding deduction on Line 250.





Canada Pension Plan Benefits As noted in Chapter 3, the Canada Pension Plan (CPP) is a contributory, earnings-related plan that compensates for loss of income due to retirement, disability, or death. Québec has an equivalent program, the Québec Pension Plan. Canada Pension Plan benefits are reported on a T4A(P) slip. The amount of taxable benefits is shown in Box 20, and is reported on Line 114 of the return. The amount of income tax deducted is shown in Box 22, and is reported on Line 437 of the return. Boxes 14, 15, 16, 17, and 18 indicate the amount of each type of CPP benefit paid. Since all of these amounts are included in Box 20, they are not entered anywhere on the tax return (except for Box 16, which is entered on Line 152 for information purposes only)

T4A(P) Slip

The different types of CPP benefits are described below. A retirement benefit (Box 14) is a pension received by a person who contributed

to the plan. Such benefits are discussed in more detail in a later chapter. A survivor benefit (Box 15) is a pension received by the surviving spouse or

common-law partner of a contributor. A disability benefit (Box 16) is a pension received by a contributor because of

disability. Box 16, although included on Line 114, must also be entered at Line 152 of the

tax return (immediately to the left of Line 114). The reason for this is that CPP disability pensions count as “earned income” for RRSP purposes (discussed in Chapter 9). Putting the amount on a separate line allows the CRA to determine which amounts on Line 114 count as earned income and which do not. When calculating total income at Line 150, do not include the amount at Line 152. If you add in the amount on Line 152, in addition to Line 114, you will “double count” the benefit.

A child benefit (Box 17) is a pension received by the child of a deceased or disabled contributor. To receive a CPP child benefit, the child must be either under eighteen, or between the ages of eighteen and twenty-five and in full-time attendance at a school or university.

CPP child benefits are always the income of the child (even if received directly by a parent on behalf of an underage child). Therefore, the benefits must always be included in the child’s net income when calculating any dependant credits for the child.

If the child is between eighteen and twenty-five and in full-time attendance at a school or university, the benefits are reported on a T4A(P); if the child is under eighteen, the benefits are not reported on an information slip (but still must be included in the child’s net income when calculating dependant credits for the child).



A death benefit (Box 18) is a single payment made to the estate of a contributor upon the death of the contributor. This amount may be reported by the estate or by the beneficiary; it is never reported on the deceased person’s return.

Box 13 shows when CPP benefits first became payable and Box 21 indicates the number of months for which benefits were received. This information is important for recipients of CPP retirement or disability pensions who are also employed for all or part of the year. As explained in Chapter 3, maximum pensionable CPP earnings and the basic exemption must be prorated in such cases. The effective date shown in Box 13 of a T4A(P) slip will alert you to the need for proration.

Illustration 7.2

David Marco received CPP benefits as shown on the T4A(P) below. The entries on his return are shown immediately following.

Lump-Sum CPP Benefits Social Development Canada occasionally takes a long time to process CPP claims. As a result, an individual may receive several years’ worth of payments all at the same time when the claim is finally approved. Because this income is taxed in the year it is received, a greater tax liability may result than if it had been taxed over several years. However, if the part of a lump-sum payment that relates to a prior year is at least $300, the Income Tax Act allows taxpayers to elect to have a CPP lump sum payment taxed as if it had been received in the correct years. If this election is made, the CRA will apply the tax calculation that benefits the taxpayer most.



A return with a lump-sum benefit should be prepared in the usual way. This means the entire lump sum is reported on Line 114 (and if it is a disability payment, on Line 152) and tax is calculated in the usual way. The letter from Social Development Canada should then be attached to the return. When the return arrives at the CRA, they will determine whether it is beneficial to tax the prior year benefits at the prior year rates, or to tax the entire amount at the current year rates. If prior year rates are more beneficial, an adjustment will be made by the CRA which will reduce the current year tax liability. The Notice of Assessment sent to the taxpayer will indicate the results of the CRA’s calculation.



Employment Insurance Benefits The main purpose of employment insurance (EI) is to replace part of the earnings lost by a person during a period of unemployment. The program is financed by employee and employer contributions, as described in Chapter 3. When an employee stops working, he or she is issued a Record of Employment by the employer. The employment information shown on that form is used by Human Resources and Skills Development Canada to decide if a person qualifies for EI benefits and, if so, their amount and duration, which vary according to the length of prior employment and a number of other factors. At the end of the year, EI benefits are reported on the T4E information slip.

T4E Slip

Total employment insurance benefits paid in the year are shown in Box 14, and this amount is reported on Line 119. Federal income tax deducted, shown in Box 22, is reported on Line 437. The rest of the boxes provide additional information about the benefits received: Boxes 15 and 17 indicate the type and amount of taxable benefits paid. All of

these amounts are already included in Box 14 and should not be entered anywhere on the return.

Box 18 (in the “Other Information” section) shows the amount of tax-exempt benefits included in Box 14. Reduce the amount in Box 14 by the amount in Box 18 and report the net amount on line 119.

Box 20 shows the amount of training assistance included in Box 14; for which the taxpayer may claim the education amount. This topic is discussed in Chapter 11.

Box 21 shows the amount of adult basic education training included in Box 14 for which a deduction may be claimed on Line 256. This deduction is discussed in Chapter 11.



Box 23 shows the amount of Québec income tax withheld. For taxpayers resident in Québec on December 31, the amount is reported on the Québec return. For all other taxpayers, the amount is reported on Line 437 of the federal return.

Box 30 (in the “Other Information” section) shows the amount of EI repaid to the government. This amount may be deducted on Line 232, and is discussed below.

Box 36 (in the “Other Information” section) shows the amount of Provincial Parental Insurance Plan benefits received by taxpayers in Quebec. This amount is already included in Box 14 and should not be entered anywhere on the return.

Illustration 7.3

Julia received $10,500 of regular EI benefits during the year, as shown in the T4E below. Note that the total benefits are shown in Box 14 and are identified as to type in Box 15. The entry on her return is shown immediately following.


EI Benefits Repaid Occasionally, taxpayers may receive more EI benefits than they are entitled to. Such overpayments must be repaid to the government, either directly (by cash, cheque, etc.) or indirectly, by having future benefits reduced. In some cases, the repayment is shown in Box 30 of the T4E; in other cases, the repayment is shown on an official receipt, Statement of Crown Debts Repaid. In either case, the repayment is deducted on Line 232.





Social Benefits Repayment Taxpayers with incomes over certain limits are required to repay a portion of certain social benefits received. The benefits to which this “clawback” rule applies are Old Age Security and employment insurance benefits. The repayment is made by including the amount to be repaid on Line 422 so that it is included in the total tax payable on Line 435. The taxpayer is allowed to deduct the same amount on Line 235 so that the benefits being repaid are not included in net or taxable income. The OAS clawback is discussed in Chapter 12. The EI clawback is discussed below.

Employment Insurance Clawback Taxpayers who receive regular EI benefits must repay a portion of their EI benefits if their “net income before adjustments” at Line 234 exceeds a specified base amount. An exception is made for first time claimants. For this purpose a first time claimant is defined as one who has received less than one week of EI benefits in the last 10 years. Note that the clawback applies only to regular benefits reported in Box 15. It does not apply to benefits reported in any of the other boxes. Taxpayers who are subject to clawback will have a repayment rate of 30% in Box 7.

Clawback Calculation The income repayment threshold is $52,875, and the clawback is equal to the lesser of: 30% of regular benefits received; and 30% of net income in excess of $52,875. The clawback is based on net EI benefits, which is calculated by subtracting any benefits repaid in the year (on Line 232) from the amount of EI benefits reported on Line 119.

Illustration 7.4

Assume that Julia (from Illustration 7.3) had a net income before adjustments of $60,000. Because Box 7 shows a rate of 30%, she is subject to EI clawback. Julia determines that she must repay $2,137.50 calculated as the lesser of: • 30% of the regular benefits received = $10,500 x 30% = $3,150; and • 30% of net income in excess of $51,375 = ($60,000 - $52,875) x 30% = $2137.50



Do not confuse the clawback of EI benefits on Line 235 (which arises when a taxpayer’s net income exceeds the clawback threshold) with the deduction for repayment of EI benefits directly to Human Resources and Skills Development Canada on Line 232 (which arises because the taxpayer received benefits to which he or she was not entitled).



Charitable Donations Taxpayers may claim a federal non-refundable tax credit of 15% of the first $200 of charitable donations and 29% of the balance. All provinces provide a provincial credit as well, which varies from province to province. All donations must be supported by official receipts or must appear on information slips. The total amount of donations that may be claimed in a year is generally limited to 75% of a taxpayer’s Line 236 net income. Gifts of capital property, however, are subject to special rules that essentially adjust the claim to 100% of the taxable income resulting from the donation of the property. The limit for charitable donations increases to 100% of a person’s net income in the year of death, and the immediately preceding year. This increases the chance that donations will be able to be completely used up. If advantageous, donations made in the year of death may be carried back and claimed on the return for the previous year. Any donations in excess of the net income limits, or which are not required to reduce tax, may be carried forward up to five years. Taxpayers are not obligated to claim donations in the year in which they are made. They may claim whatever amount is most advantageous, or no amount at all, if that is the best choice. For smaller donations, it may be advantageous to save up donations for several years in order to take advantage of the higher credit for donations over $200.

Illustration 7.5

Mindy makes charitable donations of $200/year. If she claims the federal charitable donations credit each year, her credit over a period of five years will be $150. (calculated as 5 x $200 x 15%, assuming the credit rate remains at 15%). If Mindy keeps her receipts and claims all the donations in the fifth year, her federal credit will be $262, calculated as $200 x 15% plus $800 x 29%. Mindy has to decide whether the $112 difference is worth the nuisance of keeping the receipts and the loss of income she foregoes on the credits she did not receive in years one through four.



Taxpayers who decide not to claim donations made in the current taxation year should keep their receipts for use in any of the next five taxation years. Taxpayers who are claiming a carryforward of donations from a previous year and have already included the receipts with that year’s return, should include a note with the return showing the year(s) in which the donations were made and the amount of carryforward. Though it is not obligatory, the oldest donation being carried forward should always be claimed first (thus minimizing the chance that a donation will become “too old” to use).

Illustration 7.6

Last year Sara made charitable donations of $1,600. She claimed $1,200 of the charitable donations on her return, and carried $400 forward. This year she made donations of $1,000. Subject to her net income limit, she can claim up to $1,400 for the year, i.e., the $400 carryover plus the $1,000 donated during the year.

Qualifying and Non-Qualifying Donations To be claimed, donations must be made to: Canadian registered charities; registered Canadian amateur athletic associations; prescribed universities outside Canada; tax-exempt housing corporations resident in Canada that only provide low cost-

housing for seniors; Canadian municipalities; a municipal or public body performing a function of government in Canada; monetary gifts made directly to the Federal Debt Servicing and Reduction

Account. registered national arts service organizations; the United Nations or one of its agencies; or charities outside Canada to which the Government of Canada made a donation

in the tax year or previous tax year. “Canadian registered charities” include most churches, schools, colleges, universities, libraries, and museums operated on a non-profit basis. Donations must be substantiated by an official donation receipt clearly stating the amount of the gift. The receipt must be dated, serially numbered, show the name, address and registration number of the organization, CRA’s name and web site address and be signed by a duly authorized officer of the organization. The name and address of the donor should be clearly indicated. A receipt is not required, however, if the donation is shown on an information slip, like a T4, T4A, T3 or T5013.



Charitable donations must be true gifts, given without any consideration in return. This means that the cost of tickets to a benefit performance or a charity ball cannot be claimed (even though the price may be in excess of the normal price for such an event) unless the charitable organization separates the admission cost from the donation, and issues an official receipt for the amount qualifying as a donation. Oddly enough, religious education is not viewed by the CRA as “consideration” for purposes of the charitable donation. Therefore, tuition fees paid to a school that teaches only religion can be claimed as a charitable donation, provided the school is a registered Canadian charitable organization. Similar treatment is accorded to the portion of tuition fees relating to religious education that are paid to a school teaching both religious and academic courses. In either case, official charitable donation receipts are required. Persons who receive income from sources in the United States may claim donations to charitable organizations in that country that are recognized under U.S. law. Generally, these donations cannot exceed 75% of U.S. source income that is taxable in Canada. However, commuters living near the border who work in the United States are restricted only to the general limitation of 75% of net income from all sources. Donations made to a college or university in the United States that was attended by the taxpayer or a member of his or her family are not subject to the 75% of U.S. net income requirement.

Gifts of Property Gifts of property other than money may qualify as charitable donations, provided the property has substantial value (i.e., donations of items of nominal value, such as old clothing, would not qualify). The donation of qualifying property is deemed to be a disposition of the property, which generally results in a capital gain or loss (if a capital property) or income (if inventory) that must be reported in the year of donation. The rules governing gifts of property that result in income inclusion are not discussed in this course. However, interested person can obtain additional information in the CRA pamphlet entitled Gifts and Income Tax.

Gifts of Cultural Property Capital gains that result from the gifts of cultural property are not taxable. In addition, the limit on such gifts is 100% of the value of the property, rather than 75% of net income. In order to qualify as a gift of cultural property, the property must be certified by the Canadian Cultural Property Export Review Board and the donation must be made to a designated institution. Both the official receipt from the institution and Form T871 Cultural Property Income Tax Certificate must be attached to the income tax return.

Artists Artists who donate works of art from their inventory to certain institutions or public authorities may claim a charitable donations tax credit based on the fair market value (as determined by the Cultural Property Export Review Board) without having to include this amount in their incomes.




Eligible Amount of Donations For donations for which the taxpayer receives some sort of advantage for making the gift, the amount that will be eligible for the credit will be the amount of the donation or gift in excess of the advantage received. An advantage is any property, service, compensation, or other benefit received by the taxpayer or someone related to the taxpayer as a consequence of the donation.

Donations Made By Spouse or Common-law Partner Taxpayers may claim donations made in the name of a spouse or common-law partner. If the combined receipts of the taxpayer and his or her spouse or common-law partners are in excess of $200, the donations should ordinarily all be claimed on the return of one partner or the other to take advantage of the higher tax credit rate of 29%. In cases where it is more advantageous to report all donations on one partner’s return, and some or all of the other partner’s donations have been indicated on his or her information slip(s), the problem of a supporting receipt may arise. In this situation, when filing a paper return, the CRA will accept a photocopy of the spouse or common-law partner’s information slip. On the photocopy, the box showing the amount of charitable donations should be clearly circled and “Original filed with spouse or common-law partner’s return” written in a conspicuous spot.

Members of Religious Orders Members of a religious order who have taken a vow of perpetual poverty may donate the entire amount of their earned income and pension benefits to the order. If they do so, they can claim a deduction for the entire amount on Line 256, rather than claiming a non-refundable credit on Line 349.


Claiming Charitable Donations The federal credit for charitable donations is calculated on Schedule 9, and then transferred to Line 349 of Schedule 1.

Schedule 9

On Schedule 9, all donations except cultural and ecological gifts are totaled, and the result is entered on Line 1. On Line 2, the 75% net income limit is calculated and is adjusted on Lines 3, 4, and 5 for gifts of capital property. The lesser of Line 1 and 6 is carried to Line 340, and to this is added the qualifying cultural, ecological and government gifts on Line 342.



The federal non-refundable tax credit is then calculated as follows: If the total donations are $200 or less, the credit is 15% of that amount and is

entered on Line 346. If the total donations exceed $200, a credit for 15% of the first $200 ($30) is

entered on Line 346, and a credit for 29% of the remaining amount is entered on Line 348.

The total of Lines 346 and 348 is then carried to Line 349 of the tax return. The amount at Line 349 is then added to the non-refundable tax credits figure

on Line 338 to arrive at the total federal non-refundable tax credits (Line 350), which are applied against federal tax.

If a taxpayer’s total donations exceed 75% of net income, or if the taxpayer does not want or need to use the entire amount of donations in the current year, be sure to keep a record of the amount that is being carried forward to future years. See Illustration 7.7 below.

Illustration 7.7

Abe has the following receipts for charitable donations: St. Paul’s Church $600 University of Toronto 250 Canadian Heart Fund 100 United Appeal 120 Royal Ontario Museum Total donations $1,170

100

His net income for the year is $20,200. His Schedule 9 is shown below:



In addition to the federal charitable donations tax credit, taxpayers are entitled to a provincial charitable donations tax credit. For details on the credit available in your province, consult your provincial supplement.


Legal Expenses Legal fees are generally not deductible unless they were incurred to earn income from business or property. However, the Income Tax Act allows the following legal fees to be deducted on Line 229 or Line 232: Legal fees paid to collect or establish a right to salary or wages (Line 229).

Failure to actually collect anything does not preclude claiming the deduction. The allowable deduction is the cost paid less any award for costs made by the court. Any award of costs that is not used to reduce deductible expenses must be included as income.

Legal expenses incurred to obtain or establish a right to pension benefits or retiring allowances, or awards for wrongful dismissal (Line 232). However, the deduction is limited to the amount of the pension income, retiring allowance or award received in the year, less any related transfer to an RRSP or RPP. Any expenses that cannot be deducted because of this limitation may be carried forward and deducted in one of the following seven years subject to the same limitation.

Fees and expenses incurred to prepare an objection to or appeal against a tax assessment, interest, or penalties under the Income Tax Act (Line 232).

Expenses relating to an objection to or appeal against an assessment or decision made under the Unemployment Insurance Act or the Employment Insurance Act (Line 232).

Costs incurred to appeal or object to a provincial income tax assessment, any foreign tax assessment where the foreign tax is creditable, or an assessment under the Canada Pension Plan or Québec Pension Plan (Line 232).

In all of these cases, the costs of preparatory work as well as any court costs are deductible. The circumstances in which legal fees relating to support payments are deductible are discussed in Chapter 10.

Non-deductible Legal Fees All other legal fees, except those incurred to earn income from a business or property are generally not deductible. Non-deductible legal fees include, but not limited to, the following: The cost of obtaining a divorce or separation agreement (except as the costs

relate to a spousal or child support order); The cost of defending oneself against civil or criminal charges;



Legal fees related to the purchase of capital property (these costs may be used to increase the ACB instead).


Additional Deductions Several deductions from net income may be claimed on Line 256. If any explanation about the details of the deduction(s) being claimed is necessary, a note outlining these details should be prepared and, for paper returns, be attached to the return. Commonly encountered deductions claimed on this line are described below.

Income Exempt under a Tax Treaty A deduction may be claimed at Line 256 for foreign income exempt from tax in Canada by a tax treaty, but only if the amount is included in income on the return. Foreign pension benefits are the most common example of such amounts (see the discussion in Chapter 12).

Vow of Perpetual Poverty As explained earlier, individuals who are members of religious orders at any time during the year and who have taken a vow of perpetual poverty may deduct on Line 256 the entire amount of their earned income and pension benefits that were paid in the year to the order. Earned income, in this context, is total income from employment (including tips and gratuities); net self-employed income excluding losses; training allowances; the taxable portion of scholarships, bursaries, fellowships, and similar awards; and net research grants. Note that the entire amount of earned income and pension benefits must be paid to the order, not just a part of it, to claim this deduction. If a deduction is claimed under this provision, the individual may not claim the charitable donations tax credit for any other donations made in the current year. A letter from the individual’s order or employer stating that a vow of perpetual poverty has been taken must accompany the return.


Other Income A number of items are reported on Line 130, which is identified on the T1 return as “Other income.” You should always be careful to verify whether a given amount should be reported on Line 130 or on Line 104. The reason is that amounts reported on Line 104 are included employment income for the purposes of the Canada Employment Credit (as discussed in Chapter 2) and also in earned income for the purpose of calculating a taxpayer’s RRSP deduction limit (see Chapter 9), while those reported on Line 130 are not.



Several kinds of income that are reported on Line 130 are discussed below.

Death Benefits A death benefit is an amount paid to a spouse or common-law partner or other person upon the death of an employee in recognition of his or her service in an office or employment. Such benefits are reported in Box 28 of a T4A slip. A deduction of up to $10,000 from the gross amount may be allowed to the surviving spouse or common-law partner or other recipient. Only the net amount is included in income on Line 130. Do not confuse this kind of death benefit with an amount received as a death benefit from the Canada Pension Plan. A CPP death benefit is completely taxable and is reported by the estate on a T3 return, or on Line 114 of the beneficiary’s return.

Apprenticeship Incentive Grants (AIG) Registered apprentices who have successfully completed their first or second year level of an apprenticeship program in one of the Red Seal trades are eligible to apply for a cash grant of $1,000 per year. This grant is taxable and reported to the apprentice in Box 28 of a T4A slip. Report the amount on Line 130.

Apprenticeship Completion Grant (ACG) Apprentices who complete their training, become certified in a designated Red Seal Trade and obtain either the Red Seal endorsement or a provincial or territorial certificate are eligible to apply for a cash grant of $2,000. This grant is taxable and reported to the apprentice in Box 28 of a T4A slip. Report the amount on Line 130.

Gains from Theft or Embezzlement Any amounts received from criminal or other illegal activities must be included in income. If the property received is other than cash, its fair market value should be included in income. If a taxpayer repays any amounts previously included in income he or she is allowed a deduction for the amounts repaid.

Other Amounts The following miscellaneous amounts are also reported on Line 130 of the tax return: retiring allowances (discussed in Chapter 12); lump-sum payments from pensions or deferred profit sharing plans (discussed in

Chapter 12); scholarships, fellowships, bursaries and achievement prizes that are not exempt

(discussed in Chapter 11); payments for serving on a jury; amounts in Box 26 of a T3 slip;



payments received from income assistance programs intended to benefit fishers such as the Atlantic Groundfish Strategy (does not apply to self-employed fishers);

payments from a Tax Free Savings Account, Box 28 of a T4A slip; and income not reported elsewhere on the return.

2009 General Income Tax and Benefit Guide, pages19 to 20


Working Income Tax Benefit The Working Income Tax Benefit (WITB) is a refundable tax credit introduced in 2007 that is intended to provide tax relief for eligible working low-income individuals and families who are already in the workforce and to encourage other Canadians to enter the workforce. This credit is available to eligible taxpayers in 2010 based on the income reported on their 2009 income tax returns. These payments are made on the 5th day of each quarter. The credit is claimed by completing Schedule 6 Working Income Tax Benefit (see TTS Reference Book) and transferring the claim to line 453 on the return. Advance payments for the 2010 tax year can be applied for by applying before August 31, 2010 using form RC201, Working Income Tax Benefit Advance Payments Application for 2010.

Schedule 6

Eligibility To be eligible for the WITB, taxpayers must be: resident in Canada throughout the year, and age 19 or older at the end of the taxation year or have an eligible spouse or

common-law partner or eligible dependant at the end of the year. Taxpayers are not eligible if they are: enrolled as a full-time student at a designated educational institution* for more

than 13 weeks in the year (unless they have an eligible dependant), confined to a prison or similar institution for more than 90 days in the year, or exempt from paying income tax in Canada by virtue of being an employee of a

foreign government.

* Designated educational institutions include: ▪ Canadian universities, colleges, and other educational institutions providing

courses at a post-secondary school level, ▪ Canadian educational institutions certified by the Minister of Human

Resources Development as offering non-credit courses that develop or improve skills in an occupation,



▪ universities outside Canada where a Canadian student is enrolled in a course that lasts at least 13 consecutive weeks and leads to a degree, and

▪ universities, colleges, or other educational institutions in the United States that give courses at the post-secondary school level if the student is living in Canada (near the border) throughout the year and commutes to that institution.

Eligible Spouse or Common-Law Partner An eligible spouse is a person who meets all of the following conditions: is the taxpayer’s cohabiting spouse or common-law partner at the end of the

year, and meets the criteria above to be eligible for the WITB.

Eligible Dependant An eligible dependant is a child who, at the end of the tax year: lives with the taxpayer, is under 19 years of age, and is not eligible for the WITB.

Working Income Tax Benefit Checklist

Amount of Benefit The amount that an eligible taxpayer may receive depends on the following criteria: Working income Family net income Whether they have an eligible spouse Whether they have an eligible dependant Province of Residence

Working Income Working income for a tax year is the total amount of an individual’s or family’s income for the year from employment and business (excluding losses).

Disability Supplement Taxpayers who are eligible for both the WITB and the disability amount may also be able to claim an annual disability supplement of up to $462.50 for 2009.



The table in illustration 7.8 shows the income ranges and benefits for single taxpayers and couples in all provinces except Alberta, British Columbia, Quebec and Nunavut. The second column shows the details of the calculation of the disability supplement at various income levels and family situations. Refer to the provincial supplements for the unique WITB calculations for the provinces of AB, BC, QC and NU.

Illustration 7.8

2009 WITB WITB Disability Supplement

Single Taxpayer

Family (or Single Parent)

Single Taxpayer

Family (or Single Parent)

Minimum working income

$3,000 $3,000 $1,150 $1,150

Credit rate 25% 25% 25% 25%

Maximum credit $925 $1680 $462.50 $462.50

Clawback begins at $10,500 $14,500 $16,667 $25,700

Clawback rate 15% 15% 15%* 15%*

Net income for maximum credit $6,700 $9,720 $3,000 $3,000

Maximum income before credit fully clawed back $16,667 $25,700 $19,750 $28,783

*if both spouses qualify for the disability supplement this rate is cut in half.

Calculation of WITB benefit The calculation of the Working Income Tax Benefit is completed on Schedule 6 and reported on Line 453 of the T1 General.



Illustration 7.9

Rex is 20 years old, single and lives in Ontario. His income for the year consists of $6,414 of social assistance and $4,351 from employment. He is entitled to a Working Income Tax Benefit of $294.40 as shown in Step 2 of his Schedule 6 below.

Illustration 7.10

If Rex (Illustration 7.9) is eligible for the disability amount, he would also be eligible for the WIBT Disability Supplement of $462.50 as shown in Step 3 of his Schedule 6.



Prepayment Eligible taxpayers may apply to have 50% their current year’s estimated WITB prepaid. Prepayments will be made on the same payment cycle as GST credits are paid but the entire prepayment will be paid over the number of GST payment dates remaining in the year. Thus, for example, an application made in May 2010 will earn 1/3rd of 50% of the estimated WITB in July, October and January. Prepayments will be reconciled to the actual entitlement when a return is filed by adding the prepayment amount to taxes owing.

Application for Prepayment Applications for prepayments must be made using form RC201 and filed before September 1. The application must be accompanied by proof of residency and adequate evidence of anticipated earnings. In the case of cohabiting spouses or common-law partners, a joint application must be made in which the spouses or partners designate which of them is to receive the advance payment. The individual designated in a joint application must have either the higher expected working income for the taxation year or be an individual who can reasonably be expected to be entitled to the WITB Supplement for the year. When one spouse receives the prepayment only that spouse may make a claim for the Basic Working Income Tax Benefit.

Who Must Claim The WITB must be claimed as follows: If there is an eligible spouse and neither is disabled, the WITB must be claimed

by the one with the higher working income. If there is an eligible spouse and one of them is disabled and has sufficient

working income to claim the supplement, that person should claim both the basic WITB and the WITB disability supplement regardless of who has the higher working income.

If both spouses are disabled and both have sufficient working income to claim the supplement, the one with the higher working income should claim the basic WITB. However, both must claim their own WITB disability supplement on a separate Schedule 6.

The one who is not claiming the basic WITB completes Steps 1 and 3 only.


Complete Q15 to 18.



Home Renovation Tax Credit A temporary non-refundable tax credit for home renovations was introduced for the 2009 taxation year. It is based on eligible expenditures in excess of $1,000 but not more than $10,000, resulting in a maximum credit of $1,350 (calculated as $9,000 x 15%). It may be claimed for eligible expenditures made after January 27, 2009 and before February 1, 2010. Expenditures made in January 2010 must be claimed on the 2009 tax return. Eligible expenditures include building materials, labour, equipment rentals and the cost of getting permits. However, the renovations must be of an enduring nature and integral to the dwelling. Some examples are: Renovating a kitchen or bathroom; Putting in a new carpet or hardwood floors; Building a new deck, fence or retraining wall; Installing a new furnace or water heater; Painting the interior or exterior of the house; and Laying new sod. Expenditures that cannot be claimed include: Repairs or maintenance performed on a yearly or more frequent basis (such as

furnace or carpet cleaning); Furniture or appliances; Tools or equipment that will retain a value beyond the renovations; and Financing costs. The renovations must be made to a personal-use property such as a home, cottage or condominium. The credit is limited to one per family, which includes the taxpayer’s spouse or common-law partner and any children under the age of 18 throughout the year. However, family members will be able to pool their expenses. If the taxpayer who claims the credit cannot fully utilize it, the unused portion may be transferred to one or more of the other family members. Eligible expenses must be supported by documentation clearly verifying the supplies or work performed is within the specified time limits. The non-refundable credit is calculated on a new Schedule 12 and reported on Line 368 of Schedule 1.



Summary In this chapter you learned how to report certain types of social benefits, and how to claim the charitable donations tax credit. You also learned which legal fees can be deducted, and what deductions can be claimed on Line 256. Finally, you learned what types of income are reported on Line 130.

You have learned that: Workers’ Compensation and social assistance are non-taxable. However, they

must be reported on the T1 (on Lines 144 and 145, respectively), and a corresponding deduction may be claimed on Line 250.

Social assistance received by a spouse or common-law partner during a time in which the couple is living together must be reported by the higher-income spouse or partner. Otherwise it is reported by the recipient.

CPP benefits, including lump-sum amounts, are reported in full on Line 114 in the year they are received.

Lump-sum CPP benefits related to a prior year may be taxed as if received in the years to which they relate, if the amount is over $300. The election is made by attaching the letter from SDC to the return.

EI benefits are reported on Line 119, and any amounts repaid are claimed on Line 232.

Taxpayers whose income is over $52,875 must repay a portion of their regular EI benefits unless they are first-time claimants.

Charitable donations to registered charities and other specified agencies may be eligible for a tax credit.

The federal charitable donations tax credit is equal to 15% of the first $200, and 29% of the remainder.

Charitable donations may be claimed in the year made, or in any of the subsequent five years.

The charitable donations claim is limited by 75% of net income, except in the case of gifts of capital property and cultural and ecological gifts.

Taxpayers may claim donations made by a spouse or common-law partner. Specified legal expenses may be claimed on Line 229 or 232. Income exempt from tax under a treaty may be deducted on Line 256. Members of religious orders who have taken a vow of perpetual poverty may

deduct their earned income and pension benefits on Line 256. Death benefits (except CPP death benefits) are taxable to the extent they exceed

$10,000. Low income taxpayers who have some working income may be eligible for the

Working Income Tax Benefit. A temporary non-refundable tax credit for home renovations was introduced for

the 2009 tax year with a maximum claim of $1,350.



Chapter 8 – Taxpayers and Health

Introduction In this chapter we study the health-related credits that may be claimed on the tax return, and the disability supports deduction that may be claimed on Line 215. There is a somewhat complex relationship that exists between the medical expenses credit, the disability credit, and the deduction of attendant care expenses. You will likely need to read the material about all three subjects before you fully understand the relationship between them.


Determine the qualifications for the disability amount and claim the amount; Transfer the unused portion of the disability amount from a dependant or

spouse/common-law partner; Explain Registered Disability Savings Plan; Claim allowable medical expenses; Claim the refundable medical expense supplement for eligible taxpayers; and Determine the qualifications for the disability support deduction and make the

claim.



Disability Amount The first health-related credit we study in this chapter is the disability amount. This amount partially compensates disabled taxpayers for the extra expenses incurred as a result of their disabilities. In order to claim the disability amount a person must file (or have on file) with the CRA a properly completed and certified T2201 Disability Tax Credit Certificate. This form, which must be completed in part by a qualified person, enables the CRA to determine whether or not the person meets the definition of “disabled.” Qualified persons include a licensed doctor, optometrist, audiologist, psychologist, speech-language pathologist, occupational therapist, or physiotherapist. The Income Tax Act is quite explicit as to what constitutes a disability. The requirements are met only in cases where a taxpayer is blind, or has a severe and prolonged mental or physical impairment, lasting at least twelve consecutive months, which makes it extremely difficult or time-consuming to carry out the basic activities of daily living, even with therapy and the use of appropriate devices and medications. The “activities of daily living” are explicitly defined as the ability to feed and dress oneself, hear, see, eliminate (bladder and bowel functions), walk and have the mental functions necessary for everyday life (including memory; problem-solving, goal-setting and judgement; and adaptive functioning). For clarity, the Act confirms that “no other activity, including working, housekeeping, or a social or recreational activity, shall be considered as a basic activity of daily living.” Form T2201 Disability Tax Credit Certificate is shown in Illustrations 8.1 through 8.12. The first three pages provide an overview of the disability amount including eligibility and filing requirements, and relevant definitions. Part A, which starts on the fourth page, is completed by the applicant or a representative of the applicant. Part B, which begins on following page, is completed by a qualified person (see above), who must first answer several detailed questions that determine whether the patient will qualify for the disability amount. Certification by the qualified person is completed at the bottom of the last page. Note that the person qualifies for the disability amount only if the qualified person (see above) answers “yes” to one of the questions indicating the patient is markedly restricted or “yes” to the “life-sustaining therapy” or “cumulative effects of significant restrictions” questions and “yes” to the “duration” question. It is important to read the form carefully, since the fact that a disability credit certificate has been properly signed and completed does not necessarily mean the person qualifies as disabled. If the person does not qualify, the medical professional will still sign the form (to certify that the information they have provided is true and complete), but if they have answered “no” to all markedly restricted questions, and “no” to the “life-sustaining therapy” and “cumulative effects of significant restrictions” questions or “no” to the “duration” question, the person does not qualify. The important thing to remember is that it is the answers to the questions which indicate whether a person qualifies as disabled, not simply that the certificate has been signed.

158 Chapter 8 – Taxpayers and Health


Cumulative Effects of Significant Restrictions Beginning in 2005, eligibility was extended to include individuals with severe and prolonged impairments in mental or physical functions who have significant restrictions in more than one basic activity of daily living. The cumulative effect of their restrictions must be equivalent to having a single marked restriction in one basic activity of daily living. This must be certified in writing by a medical doctor unless the restrictions pertain only to walking, feeding, or dressing, in which case it may be certified by an occupational therapist. A special rule prohibits a claim for the disability amount if anyone has claimed either of the following medical expenses in respect of the disabled individual: the cost of attendant care over $10,000 or the cost of care in a nursing home. This means that either the disability amount may be claimed or these specified medical expenses, but not both.

Life-Sustaining Therapy Since the 2000 taxation year, taxpayers requiring life-sustaining therapy may qualify for the disability tax credit. To qualify, the therapy must be needed at least three times per week, totaling at least 14 hours per week on average, and must be undertaken under the certification of a medical doctor. An example of such therapy is kidney dialysis to filter a patient’s blood. Beginning in 2005, where the therapy requires a regular dosage of medication that needs to be adjusted on a daily basis, the activities directly involved in determining the appropriate dosage will be considered part of the therapy. If a child is unable to perform the activities related to the therapy because of his or her age, the time spent by the child's primary caregivers performing and supervising these activities can be counted toward the 14-hour requirement. For example, in the case of a child with Type 1 diabetes, supervision includes having to wake the child at night to test his or her blood glucose level, checking the child to determine the need for additional blood glucose testing (during or after physical activity), or other supervisory activities that can reasonably be considered necessary to adjust the dosage of insulin (excluding carbohydrate calculation).

Dietary Disorders The CRA has long held that the activity of “feeding oneself” referred to the physical act of eating, and not to the act of preparing, cooking and shopping for food. It has therefore traditionally disallowed the disability amount to those suffering from dietary disorders, and who must therefore spend an inordinate amount of time preparing, cooking and shopping for food. A court case overturned this interpretation and granted the disability amount to a man suffering from celiac disease. In response to the court case, the Department of Finance amended the Income Tax Act, effective for 2003, to define “feeding oneself” so that it applies only to the physical act of eating.



Thus, such individuals (with a dietary disorder) are not eligible for the disability amount. However, the incremental cost of gluten-free foods for individuals with celiac disease may be claimed as a medical expense.

Illustration 8.1



Illustration 8.2



Illustration 8.3



Illustration 8.4



Illustration 8.5



Illustration 8.6



Illustration 8.7



Illustration 8.8



Illustration 8.9



Illustration 8.10



Illustration 8.11



Illustration 8.12



Federal Disability Amount The federal disability amount is independent of the taxpayer’s net income. For 2009 the base amount is $7,196 and is claimed on Line 316. A supplement of $4,198 is available to persons under 18 years of age. The disability supplement is reduced if child care expenses or attendant care expenses (discussed later in this text) claimed for the child exceed $2,459. The disability supplement can be calculated using the Federal Worksheet calculation for Line 316.

Provincial Disability Amount Some provinces have matched the federal disability amounts while others have set their own amounts. Consult your provincial supplement for the disability amount (and supplement, if available) for your province.



Disability Amount Transferred from a Dependant Disabled persons who are dependants may not require their full disability amount to reduce their income tax to zero. In such cases, the unused portion of the disability amount may be claimed by a supporting person on Line 318. The unused disability amount may be transferred from any of the following disabled dependants if they were resident in Canada at any time during the year: any dependant for whom the taxpayer claimed an amount on Line 305; any dependant for whom the taxpayer could have claimed an amount on Line

305 if the taxpayer had not been married or had a common-law partner and if the dependant had no income;

a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the taxpayer or taxpayer’s spouse or common-law partner, for whom the taxpayer claimed an amount on Line 306 or 315; or

a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the taxpayer or taxpayer’s spouse or common-law partner, for whom the taxpayer could have claimed an amount on Line 306 or 315 if the dependant had no income and was 18 years of age or older.

The unused portion of a dependant’s disability amount is the lesser of the following two amounts: the dependant’s total disability amount ($7,196 plus the disability supplement, if

applicable); and the dependant’s total disability amount, plus the dependant’s personal amounts

on Lines 1 to 15 of Schedule 1, minus his or her taxable income on Line 260.



The calculation can be carried out using the Federal Worksheet for Line 318.

Illustration 8.13

Hugh’s 19-year-old disabled son, Blair, is resident in Canada and has a taxable income of $12,000. Blair paid EI premiums of $195 and CPP contributions of $322. The unused portion of his disability amount is the lesser of the total disability amount of $7,196, and the following: The total disability amount $7,196 Plus: Amounts claimed on Lines 300 to 315 10,320 (basic personal amount) 322 (CPP) 195 (EI) 1,044 (Canada Emp. amount) Less: Taxable income Result $7,077

(12,000)

Hugh can claim $7,077 on Line 318 of his federal tax return.

The following rules also apply to the transfer of the disability amount: The disability amount for dependants may be claimed only if no one made a

medical expense claim in respect of the disabled individual for the cost of attendant care over $10,000 or for care in a nursing home. The disability amount or these types of medical expenses can be claimed, but not both.

Seniors who are eligible to claim the disability amount and who live in a retirement home can claim attendant care expenses as a medical expense.

The disability amount may not be transferred to a supporting person who is not a spouse or common-law partner if the disabled person’s spouse or common-law partner is claiming any non-refundable tax credit (other than medical expenses) for him or her.

The disability amount transfer may be split among two or more taxpayers, as long as each one qualifies under the rules outlined above. However, the total of all claims cannot exceed the total unused disability amount. In such cases, a statement should be prepared giving the name and social insurance number of each claimant. The statement should be shown to the EFILE provider if the return is electronically filed, or attached to the return if it is paper-filed.

Persons who support two or more disabled dependants may transfer the unused portion of each one’s disability amount, subject to the rules outlined above.

A dependant who is disabled for the purposes of Line 316 or 318 is automatically “infirm” for the purposes of Lines 305 and 306. The opposite, however, does not hold.



Provincial Disability Transfer Consult your provincial supplement for the rules governing disability amount transfers for your province. Special rules apply where the disability amount is transferred between the residents of different provinces. These rules are summarized in the TTS Reference Book.



Amounts Transferred from Your Spouse or Common-law Partner Taxpayers who have a disabled spouse or common-law partner may transfer the unused portion of the spouse’s or common-law partner’s disability amount to their own returns on Line 326. The transfer amount is calculated on Schedule 2.

Schedule 2

Note that the disability amount is not the only amount that may be transferred using Schedule 2. Taxpayers can also transfer any unused age amount, pension income amount, tuition and education amount and the amount for children under 18. In this chapter, however, we will discuss only the transfer of the disability amount. (The rules governing the age amount and pension income amount are discussed in Chapter 12, and the transfer of tuition fees and education amount is discussed in Chapter 11.) The unused portion available for transfer is carried out as follows: Enter the disability amount and other transferable amounts on Schedule 2 and

carry the total to Line 6. Enter the spouse’s or common-law partner’s taxable income on Line 7. On Line 8, enter the total of the following amounts from the spouse’s or

common-law partner’s return: Lines 300, 308, 310, 312, 363, 364, 365, 368, 369 and 313 of Schedule 1 and Line 17 of Schedule 11.

Subtract Line 8 from Line 7 to find the spouse’s or common law partner’s adjusted taxable income (if the amount is negative enter “0”). This amount is then carried to Line 9.

Subtract Line 9 from Line 6 and enter on Line 10 (if the amount is negative enter “0”). This is the amount that can be transferred. Carry this amount to Line 326 of the taxpayer’s return.



Illustration 8.14

Rita is disabled, and has a Form T2201 on file with the CRA. She received the following income during the year: • $5,856 in CPP disability benefits; and • $1,035 in interest originating from her own funds. Rita does not need any of her disability amount to reduce her tax to zero, so she can transfer the full amount of $7,196 to her husband, Carl. His Schedule 2 is shown on the next page.

Like the disability amount for self, the disability transfer from a spouse or common-law partner may be claimed only if no one made a medical expense claim in respect of the disabled individual for the cost of attendant care over $10,000 or for care in a nursing home. The disability amount or these types of medical expenses can be claimed, but not both. Taxpayers may not claim spousal or common-law partner transfers if they were separated on December 31 and the separation lasted for a period of ninety days or more.

Provincial Disability Transfer to a Spouse or Common-law Partner Consult your provincial supplement for the rules governing disability amount transfers for your province. Special rules apply where the disability amount is transferred between the residents of different provinces. These rules are summarized in the TTS Reference Book.





Registered Disability Savings Plans (RDSPs) A Registered Disability Savings Plan (RDSP) is a plan intended to provide long-term security for a person who is eligible for the Disability Tax Credit (a “DTC-eligible individual”). Generally the plan is set up by a parent, guardian or other family member, and matching grants and bonds are available from the Federal government. The contributions made to an RDSP are not tax deductible and amounts paid out of an RDSP are not included as income to the beneficiary.

DTC-Eligible Individual The RDSP may be established for an individual who has a severe and prolonged physical or mental impairment and qualifies for the disability tax credit during the year of establishment, or would have if the restriction for the attendant care amount were disregarded. Contributions may not be made to the plan in years for which the individual is not DTC-eligible. Further, the plan must be terminated by the end of the year following the year in which the beneficiary ceases to the DTC-eligible.

Contributions Contributions to an RDSP are non-deductible and may not exceed $200,000 in a beneficiary's lifetime. Contributions can be made until the end of the year in which the beneficiary turns 59 years of age.

Qualifying Individuals The contributions made into this plan are invested and will later be used to make payments to the beneficiary. The arrangement requires the issuer to be licensed as a trustee to accept payments under the Canada Disability Savings Act. The arrangement can be entered into with a qualifying person who meets the following criteria: Is the legal parent of the beneficiary where the beneficiary is a minor If the beneficiary is not competent, the guardian, tutor or curator of the

beneficiary under the provincial laws of the beneficiary's residence. Once the beneficiary is an adult and competent, no one but the beneficiary may

enter into the arrangement with the issuer. Directors of a pre-existing RDSP may also enter into new plans under certain

circumstances.



Disability Assistance Payments A disability assistant payment is a payment made from the RDSP to the beneficiary during the beneficiary's lifetime or to the beneficiary's estate. There are no restrictions on the timing or amount of these payments or how they are used. However the following rules must be observed: The payments must not tap into the "holdback" required for repayment of

certain amounts described below The payments must begin no later than the year in which the beneficiary turns

60. There in an annual limit on the amount paid equal to the value of the assets of

the plan at the beginning of the year divided by a factor equal to three plus the remaining number of years the beneficiary is expected to live ("life expectancy") as determined by Statistics Canada. Such information will be available on the CRA website. Exceptions to these rules will be allowed when the beneficiary has survived beyond the normal life expectancy. In that case the limit on payments to be made will be one-third of the value of the plan's assets at the beginning of the year. The second exception occurs when the director of the plan provides written certification from a medical doctor that shows the beneficiary's life expectancy to be shorter than otherwise determined, in which case the calculation is based on the age to which the beneficiary can be expected to live.

Payments from an RDSP can be one of three types: ▪ a disability assistance payment made to the beneficiary or the beneficiary's

estate, ▪ a transfer to another RDSP or ▪ a repayment that is required to be made to the government.

Director of the Plan An RDSP may have one or more directors responsible for the principal decision making with respect to the plan including directing investments and the amount and timing of payments out of the plan. This could include, for example, the mother and father of the beneficiary; a parent and the beneficiary of the plan, once that beneficiary reaches the age of majority, a parent who is a successor director (in the event of the death of one parent); and an entity which acquires the rights of a director in the event of that director's death. Directors are jointly liable with the beneficiary or the beneficiary's estate for taxes arising in a non-compliant plan, described below.

Non-taxable Portion of RDSP Payments The non-taxable portion is the same as the proportion that contributions to the plan is to the total value of the plan's assets, less the assistance holdback amount, described below.



Plan Sustainability A disability assistance payment will not be allowed to be made if the payment causes the fair market value of the plan's assets to fall below the "assistance holdback amount". This is the amount that could be required to be repaid under the Canada Disability Savings Act -- the total amount of grants and bonds paid into the plan by the government in the ten-year period preceding the disability assistance payment, plus associated investment income. Should the plan become "non-compliant" it will be automatically deregistered and the taxable portion will be included in income. If a repayment is subsequently made, a deduction is possible.

Repayments Repayments of amounts received under the Canada Disability Savings Act, effective the 2007 tax year will qualify for a deduction on Line 232.

Withholding taxes It is expected that the Regulations will allow $15,000 to be withdrawn annually without the requirement for withholding taxes. Payments over this amount will be subject to the same withholding rules as Registered Retirement Income Funds. Only the taxable portion of the payment is taken into account for these purposes.

Borrowing to Contribute Interest on money borrowed to make a contribution to a registered plan, including a RDSP is not deductible. Interest is only deductible (on Line 221 as Carrying Charges) for eligible investments.

Income Income inclusions required for tax purposes includes any taxable portion of a disability assistance payment from a RDSP effective the 2008 tax year.

Withdrawal The beneficiary must start to withdraw funds from the RDSP in the year he or she turns 60. Maximum annual withdrawal amounts are to be established based on life expectancies but an ability to encroach on capital is also to be provided. Only the beneficiary and/or the beneficiary’s legal representatives can withdraw amounts from an RDSP. Contributors can never receive a refund of contributions.

Government Support The Federal government will provide direct financial assistance to RDSPs in two ways.



Canada Disability Savings Grant (CDSG) The Canada Disability Saving Grant will match RDSP contributions as follows: Up to $77,664* Family Net Income Over $77,664* Family Net Income First $500 – 300% (maximum $1,500) First $1,000 – 100% (maximum $1,000) Next $1,000 – 200% (maximum $2,000) $1,500 contributed generates $3,500 CDSG

$1,000 contributed generates $1,000 CDSG

Family income is calculated in the same manner as it is for Canada Education Savings Grant purposes (see Chapter 11 for details) except that, in years after the beneficiary turns 18, family income is the income of the beneficiary and their spouse or common law partner. There is a lifetime maximum of $70,000 that will be funded under the CDSG. An RDSP will not qualify to receive a CDSG after the year in which the beneficiary turns 49.

Canada Disability Savings Bond (CDSB) Secondly, a Canada Disability Savings Bond is to be provided for lower income families. Unlike the CDSG, there is no requirement that a contribution be made to a RDSP before a savings bond contribution is available. The maximum annual CDSB contribution is $1,000 and is earned where family income does not exceed $21,816. The CDSB amount is phased out completely when family income is $38,832. There is a lifetime maximum of $20,000 for CDSBs. Like the CDSG, CDSBs will not be paid after the beneficiary of the RDSP turns 49.

Attribution Rules Contributions made to an RDSP will not be subject to the usual attribution rules which require that income from property transferred to a spouse or common law spouse or other individuals under 18 must be reported by the transferor.

Tax Free Rollovers A tax-deferred rollover of property may be accomplished when funds are move from one RDSP to another so long as the beneficial ownership does not change.

Repayment All government grants and bonds paid into the plan during the preceding ten years must be repaid to the Government of Canada if the RDSP is voluntarily closed, the plan is deregistered, payment is made or if the beneficiary dies or ceases to be eligible for the disability amount.



Medical Expenses Taxpayers may claim qualifying medical expenses they paid in the taxation year, or in any period of twelve months ending in the taxation year.

General Rules The following general rules apply to the claiming of medical expenses: Taxpayers can claim medical expenses they paid on behalf of themselves, their

spouses or common-law partners, or their dependants. For purposes of the medical expense claim, a dependant is a person who, at some time in the year, was dependent upon the taxpayer for support and who is a child, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece, or nephew of the taxpayer or of the taxpayer’s spouse or common-law partner. Except for a child or grandchild, the dependant must also be resident in Canada at some time during the year.

Taxpayers may claim the medical expenses of their spouses or common-law partners without regard to their spouse’s or common-law partner’s income.

The medical expense claim for the taxpayer, spouse or common-law partner and minor dependent children is reduced by 3% of the taxpayer’s net income, to a maximum of $2,011.

The medical expense claim for all other dependants is reduced by 3% of the dependant’s net income, to a maximum of $2,011. The maximum claim for medical expenses of these dependants is limited to $10,000 per dependant.

Illustration 8.15

Kyle paid orthodontic expenses of $5,000 for his 20-year-old niece, Jill, whose net income is $7,800. If Kyle claims the orthodontic expenses, he must reduce his claim by $234, calculated as $7,800 x 3%.

Any twelve-month period ending in the year may be selected to arrive at the most advantageous total for medical expenses. When selecting a twelve-month period, remember the following: ▪ No expenses claimed for one year may be claimed again for the following

year. ▪ Only expenses actually paid during the twelve-month period are deductible. ▪ Claiming more medical expenses than is necessary to bring the tax payable

to zero is generally beneficial only if it increases the refundable medical expense supplement (discussed later in this chapter).

▪ If a taxpayer’s net income is particularly high in one year so that expenses exceed 3% of net income by only a small amount, it may be advantageous to carry over the expenses to the next year if the net income will be less.



If a taxpayer dies in the year, the time period for claiming medical expenses is extended to any 24-month period that includes the date of death.

Expenses incurred on behalf of a spouse, common-law partner, or dependant, but which are not paid until the following year when the person is no longer a spouse, common-law partner, or dependant, may be claimed in the year paid. This is because to be deductible, the patient need only be a spouse, common-law partner, or dependant at some time during the year in which the expenses were incurred.

Expenses for which the taxpayer is reimbursed or entitled to be reimbursed, by insurance or otherwise, cannot be claimed. If only part of an expense is reimbursed, the non-reimbursed part can be claimed.

Medical expenses can be claimed even if incurred outside of Canada. Expenses paid by either spouse or common-law partner may be claimed by the

other. Due to the 3% net income threshold, it is almost always more advantageous for

the spouse or common-law partner with the lower net income to make the claim, assuming that he or she has sufficient tax payable to absorb it.

Because claims for medical expenses of other dependants are reduced by 3% of the dependant’s net income, higher income taxpayers may be able to make these claims, if advantageous.


Qualifying Expenses Qualifying medical expenses are those listed in the Income Tax Act. The most common ones are listed below: payments for medical or dental services made to public or licensed private

hospitals or to medical practitioners, dentists or nurses; Whether or not a particular medical professional is considered a “medical practitioner” depends on whether the profession is regulated under provincial law. Since there is some variation in the regulation of health professions, certain expenses may be allowed in some provinces, but not in others. A summary of the provincially authorized medical practitioners is shown in the TTS Reference Book.

prescription drugs for the diagnosis, treatment or prevention of disease or other disorders if recorded by a pharmacist;

laboratory, radiological or other diagnostic procedures or services for the maintenance of health, prevention of disease or assistance in diagnosis of or treatment of injury, illness or disability, as prescribed by a medical practitioner or dentist;

premiums paid for private health insurance plans, including the cost of medical travel insurance (but not provincial health care premiums);



artificial limbs, wheel chairs, crutches, prescription eye glasses, dentures, insulin and equipment necessary to administer it, oxygen and oxygen tent or other equipment to administer oxygen, hearing aids, pacemakers, and many other similar devices;

transportation by ambulance to or from a public or licensed private hospital; the cost of public transportation incurred to obtain medical treatment that is not

available locally, provided the distance is 40 kilometres or more (the cost of private transportation can be deducted under these same conditions only if public transportation is not readily available). These may be claimed using either the detailed method or the simplified flat per/kilometer rate under the same rules as for “moving expenses”;

reasonable travel expenses including meals and accommodation incurred to obtain medical treatment that is not available locally, provided the distance is 80 kilometres or more. Taxpayers claiming medical travel can use either the simplified or detailed method for claiming their expenses. The simplified method involves using a flat per/kilometre rate that is the same rate as for “moving expenses” as discussed in Chapter 3. Also, meals can be claimed under the simplified system to a maximum of $51 per day without receipts. The detailed method involves claiming the actual expenses incurred;

guide dogs for persons who are blind, profoundly deaf or who have a severe and prolonged mobility impairment;

reasonable expenses relating to renovations or alterations of an existing dwelling of a person who lacks normal physical development or who has a severe and prolonged mobility impairment, to enable the person to gain access to or be mobile or functional within the dwelling. For 2009, these expenses may also qualify for the Home Renovation Tax Credit;

reasonable additional expenses incurred related to making a newly constructed principle residence more accessible for taxpayers with a severe and prolonged mobility impairment, or who lack normal physical development;

Expenses relating to new home construction or renovations or alterations to an existing dwelling of a patient who lacks normal physical development or has a severe and prolonged impairment to enable the patient to gain access to, or to be mobile or functional within, the dwelling: ▪ must be of a type that would not typically be incurred by persons who have

normal physical development or who do not have a severe and prolonged mobility impairment; and

▪ must not be of a type that would typically be expected to increase the value of the dwelling.

nursing home care for persons who are disabled, or who are lacking normal mental capacity and are thereby dependent on others for long-term personal care for the foreseeable future;

institutional care or training for persons who, because of a mental or physical handicap require such care or training, as certified by a qualified person;



20% of the cost of a van that has been adapted (or is adapted within six months of purchase) for the transportation of an individual using a wheelchair, to a maximum of $5,000;

50% of the cost of an air conditioner prescribed by a medical practitioner for an individual with severe chronic ailment, disease or disorder, to a maximum of $1,000;

reasonable moving expenses incurred by an individual who lacks normal physical development or who has a severe and prolonged mobility impairment, for moving to a dwelling that is more accessible, or in which he or she is more mobile or functional, to a maximum of $2,000 (this claim cannot include moving expenses already claimed on Line 219);

reasonable expenses for alterations to the driveway of the principal residence of an individual with a severe and prolonged mobility impairment to facilitate access to a bus;

sign language interpretation fees, incurred by a person with a speech or hearing impairment, if paid to a person engaged in the business of providing such services;

the cost of an attendant* for persons who are disabled or who, because of an infirmity, are dependent on others for long-term personal care for an indefinite period;

the cost of courses to train the taxpayer or a relative* to care for an infirm relative who is a member of the taxpayer’s household or is dependent on the taxpayer for support;

amounts paid for the care and supervision of individuals in group homes that are operated exclusively for those who qualify for the disability amount;

amounts paid to unqualified individuals* for therapy provided to disabled individuals if the therapy is prescribed and supervised by qualified medical practitioner;

amounts paid to a person in the occupation of providing tutoring services for those with learning disabilities or other mental impairments, if the need for such tutoring services has been certified in writing by a medical practitioner;

talking textbooks for taxpayers with a perceptual disability who are enrolled in an educational institution in Canada, if prescribed by a medical practitioner;

seniors who are eligible to claim the disability amount and who live in a retirement home can claim the cost of attendant care as a medical expense. A breakdown of the type of expenses that may be claimed in respect of a home or an institution is shown in the TTS Reference Book;

the cost of real-time captioning paid to someone in the business of providing such services, if the service is necessary because of a person’s speech or hearing impairment;

the cost of note-taking services paid to someone in the business of providing such services if a medical practitioner certifies in writing that they are necessary because of a person’s mental or physical impairment;



the cost paid for voice-recognition computer software that a medical practitioner certifies in writing as necessary because of a person’ physical impairment; and

the additional cost paid for acquiring gluten-free food as compared to the cost of similar non-gluten-free food, if a medical practitioner certifies in writing that the person requires a gluten-free diet because of celiac disease.

The expenses listed below as eligible disability support expense may be claimed as medical expenses if they are not claimed as disability supports. ▪ Amounts paid to purchase, operate, and maintain phototherapy equipment

for the treatment of psoriasis or other skin disorders; ▪ Amounts paid to operate and maintain an oxygen concentrator (including the

cost of electricity); ▪ The cost of drugs or medical devices obtained under Health Canada’s Special

Access Program; ▪ The cost of medical marihuana or marihuana seeds purchased from Health

Canada, or for medical marihuana purchased from an individual who possesses a Designated-Person Production License under the Marihuana Medical Access Regulations (MMAR).

Qualifying medical expense introduced for 2008 include the following: ▪ Auditory feedback devices for the treatment of speech disorders; ▪ Electrotherapy devices for treatment of medical conditions or severe mobility

impairment; ▪ Standing devices for standing therapy for treating severe mobility

impairment; and ▪ Pressure pulse therapy devices used with respect to balance disorders; ▪ Service animals for individuals severely affected by epilepsy or autism.

Note that expenses marked with an asterisk (*) do not qualify if paid to a spouse or common-law partner or to someone under 18. While this list is far from complete, it provides a summary of many of the more common medical costs that may be claimed for tax purposes.

A complete list of eligible medical expenses is available on the CRA website.

Non-Qualifying Expenses Medical expenses not listed in the Income Tax Act cannot be claimed on the tax return. These include items such as non-prescription medications, food or food supplements, non-prescription birth control devices, health programs offered by health clubs and gyms, athletic club expenses, humidifiers, maternity clothes, and funeral and burial costs. It also includes vitamins, herbs, and botanical remedies prescribed by a naturopath. Although a naturopath may qualify as a medical practitioner, the substances which they prescribe are not the type that are recorded by a pharmacist, and therefore these substances are not claimable. This list is not complete, but serves as a reminder of some common non-qualifying expenses.



Medical Expenses for Disabled Persons There are a number of medical expenses described above which can be claimed by, or on behalf of, disabled persons. However, as explained earlier, the following two expenses, if claimed as a medical expense, will invalidate a claim for the disability amount for that person: the cost of attendant care over $10,000; or the cost of care in a nursing home. Therefore, consider carefully which claim is more advantageous before deciding whether to claim the above medical expenses for someone who is disabled. (If claiming such expenses for someone who is infirm, but not disabled, this caution does not apply, since such a person does not qualify for the disability amount.)

Receipts and Documentation In order to claim any medical expenses, the taxpayer must have receipts for them. The receipts must indicate the purpose of the payment, the date of the payment, the name of the patient for whom the payment was made and, if applicable, the medical practitioner or dentist who prescribed the purchase or provided the service. Note that a cancelled cheque or credit card receipt is not acceptable as a substitute for a proper receipt. In addition to receipts, if claiming the cost of attendant care, nursing home care, or institutional care or training, a certificate or letter from a medical practitioner or other qualified person is required, attesting that the patient meets the requisite conditions. All receipts and documentation must be shown to the EFILE provider if the return is electronically filed. For paper returns, documentation and all receipts, except those for insurance premiums, must be attached to the return.


Claiming Medical Expenses A taxpayer is not required to itemize medical expenses on a separate schedule in order to claim them. However, it is usually advisable to do so to make sure that no expense is overlooked, and that all are within the chosen 12-month period. On the list, show the period covered by the claim (for example, June, 2008, through May, 2009). Then list each payment, showing the date of the payment, the name of the patient, the name of the person to whom the payment was made, and a description of the medical expense. If premiums to a private health services plan are claimed, indicate the period covered by the plan. When all the expenses are listed, add them up and carry the result to Line 330 on Schedule 1 of the T1 General.



Note that since expenses paid for the taxpayer, spouse or common-law partner and minor dependent children are reduced by 3% of the taxpayer’s net income whereas claims for medical expenses of other dependants are reduced by 3% of the dependant’s net income, the expenses must be segregated by patient. Total the claims for the taxpayer, spouse or common-law partner and minor dependent children and post the amount to line 330. Subtract 3% of the taxpayer’s net income or $2,011, whichever is less, and put the difference on line (A) of Schedule 1. For claims for other dependants, total the expenses for each dependant and reduce the claim by 3% of the dependant’s net income or $2,011, whichever is less. The maximum claim per dependant is $10,000 each year. Post the net claim to line 331 of Schedule 1 and list the details of each dependant and the amount of the claim on Schedule 5. Finally, total line (A) and line 331 and enter the result on Line 332 (if negative, enter zero). The amount on Line 332 is the allowable portion of medical expenses that enters into the calculation of total non-refundable tax credits.





Illustration 8.16

Louise has two dependent children, Cathy and Nick aged 8 and 12 respectively. Louise paid the following amounts to Dr. Goulet for dental work for the children: Cathy: May 19, 2009 $250 December 12, 2009 $50 Nick: November 18, 2008 $150 February 11, 2009 $350 Louise did not claim any medical expenses in 2008. Her 2009 net income is $15,000. First, note that Louise may not claim both the November 18, 2008, and the December 12, 2009, payments because the period is longer than twelve months; therefore the earlier (and larger) payment should be selected. The December 12, 2009, payment may be claimed on her 2010 return if advantageous. Louise’s completed schedule of medical expenses are shown below, followed by the entries on Schedule 1 of her of her T1 General Medical Expenses, November, 2008 to October, 2009 Date Patient Paid To For Amount 18 Nov 2008 Nick Sims Dr. Goulet Dental work $150 11 Feb 2009 Nick Sims Dr. Goulet Dental work 350 19 May 2009 Cathy Sims Dr. Goulet Dental work TOTAL $750

250

Disability Supports Deduction So far in this chapter, we have discussed medical non-refundable tax credits. Now we turn to the one health-related deduction, available only to disabled taxpayers. This is the disability supports deduction on Line 215. Since it appears before the net income line, it reduces both net and taxable income. Thus it not only reduces tax, but may also increase social benefits that are based on net income. To claim this deduction, taxpayers must have a properly certified T2201 Disability Tax Credit Certificate (or be making a claim for full-time attendant care expenses) and must incur these expenses to carry out the duties of an office or employment, to carry on a business, to carry on research or any similar work for which the taxpayer will receive a grant, or to attend a designated educational institution.



For individuals other than those attending a designated educational institution, the deduction is limited to the lesser of: the amount actually paid for the supports; and the taxpayer’s earned income. For those incurring these expenses in order to attend a designated educational institution the deduction is limited to earned income plus the lesser of: $15,000; the taxpayer’s income from other sources; and $375 multiplied by the number of weeks in attendance at the school or

educational institution. “Earned income” for this purpose is income from an office or employment, a business, net research grants, and any taxable scholarships, fellowships, bursaries, and similar awards. To claim expenses for disability supports, Form T929 Disability Supports Deduction (see Illustration 8.18) must be completed, and all the following conditions must be met: The taxpayer must be entitled to claim the disability amount (i.e., Form T2201

must be filed, or be on file, with the CRA) or must be making a claim for full-time attendant care expenses and have a mental or physical infirmity.

The expenses must be paid to enable the taxpayer to earn income from employment or self-employment, or to carry out research or similar work for which a research grant is received, or to attend a designated educational institution.

The expenses must be paid to a person eighteen years of age or older, other than the taxpayer’s spouse or common-law partner.

The expenses must ordinarily be for care in Canada; however factual residents may deduct expenses incurred outside of Canada.

No one has claimed these expenses as a medical expense. Disability supports eligible for deduction on Line 215 are also eligible to be claimed as medical expenses on Line 330. However, it is likely that, in most cases, the Line 215 claim will be the most advantageous. This is particularly so because, unlike the medical expense claim, the disability supports deduction on Line 215 does not affect the claim for the disability amount. Taxpayers may claim both the disability amount and disability supports on Line 215. The following expenses are eligible to be claimed as disability support expense: amounts paid for sign-language interpretation services or real-time captioning

services used by individuals who have a speech or hearing impairment (and paid to persons in the business of providing such services);



amounts paid for teletypewriters or similar devices that enable individuals with a speech or hearing impairment to make and receive telephone calls, if prescribed by a medical practitioner;

amounts paid for devices or equipment designed to be used only by blind individuals operating a computer-such as a Braille printer or large-print on-screen device, if prescribed by a medical practitioner;

amounts paid for optical scanners or similar devices designed for use by blind individuals to enable them to read print, if prescribed by a medical practitioner;

amounts paid for electronic speech synthesizers that enable individuals with a speech impairment to communicate by using a portable keyboard, if prescribed by a medical practitioner;

deaf-blind intervening services used by an individual who is both blind and profoundly deaf when paid to persons engaged in the business of providing such services.

In addition, the following may also be eligible for the deduction if a medical practitioner has certified, in writing, your need for those services or devices: amounts paid for note-taking services used by individuals with mental or

physical impairments (and paid to persons in the business of providing such services);

amounts paid for voice-recognition software used by individuals with a physical impairment;

amounts paid for tutoring services used by individuals with a learning disability or a mental impairment (and paid to persons in the business of providing such services);

amounts paid for talking textbooks used by individuals with a perceptual disability in connection with the individual's enrolment at a secondary school in Canada or designated educational institution;

amounts paid for full-time attendant care services provided in Canada, used by individuals with a mental or physical infirmity. Only individuals who qualify for the disability amount can claim amounts paid for part-time attendant care as a disability supports deduction;

Job coaching services (other than job placement or career counselling services) provided to an individual with a severe and prolonged impairment when paid to persons engaged in the business of providing such services;

Reading services provided to an individual who is blind or has a severe learning disability when paid to persons engaged in the business of providing such services;

A device that is a Bliss symbol board used by an individual who has a speech impairment to help the individual communicate by motioning at the symbols or spelling out words;

A device that is a Braille note-taker used by a blind individual to allow that individual to take notes (that can be read back to them or printed or displayed in Braille) with the help of a keyboard;



A device that is a page-turner used by an individual with a severe and prolonged impairment that markedly restricts the individual’s ability to use their arms or hands to turn the pages of a book or other bound document;

A device and/or software designed to be used by a blind individual or an individual with a severe learning disability to enable the individual to read print.

Illustration 8.17

Al is disabled and has Form T2201 on file with the CRA. Al is employed and earns $35,000 a year. However, to carry out his duties, he requires assistance from an attendant. During the year, Al paid $7,000 to Jonathan Coleman (SIN 805 110 822) to provide such care. Jonathan resides at 45 Eagleton Road. Al’s completed Form T929 is shown in Illustration 8.18. Al can claim $7,000 on Line 215, and the disability amount of $7,196 on Line 316.

Taxpayers must have supporting receipts for disability support expenses. These should not be filed with the return, but must be retained for examination on request.



Refundable Medical Expense Supplement A special refundable credit, called the “Refundable Medical Expense Supplement,” is available for low-income taxpayers with medical expenses or disability supports. It is calculated in the Line 452 section of the Federal Worksheet and carried to Line 452 of the T1. In order to claim the credit, the taxpayer must be 18 years of age or older at the end of the year and must have been resident in Canada throughout the year. In addition, the taxpayer must have income from employment or self-employment in the amount of $3,116 or more. To determine whether this requirement is met, add up the amounts on Lines 101, 104 and 135 through 143. Then subtract the amounts on Lines 207, 212, as well as any wage loss replacement benefits on Line 104, any employment expenses claimed on Line 229, and any clergyman’s residence deduction claimed on Line 231. If the result is $3,116 or more, the taxpayer qualifies. The credit is equal to 25% of the taxpayers allowable medical expenses claimed on Line 332 plus disability supports claimed on line 215, to a maximum of $1,067. It is reduced by 5% of net family income (excluding net UCCB income) in excess of $23,633.



If the total of a taxpayer’s net income (Line 236 less any UCCB included in line 236) and his or her spouse’s or common-law partner’s net income (less net UCCB income) is more than $44,973 this credit cannot be claimed. Because it is a refundable tax credit, it may be beneficial for taxpayers whose income is too low to benefit from the regular claim for medical expenses.

Illustration 8.18



Illustration 8.19

Mary is a single parent whose income for the year includes $10,000 in social assistance benefits, $1,200 in UCCB payments, and $6,000 from a temporary job. During the year, she paid a total of $1,000 for dental work. Her allowable medical expense claim on Line 332 is $484 ($1,000 - 3% x $17,200). Because her taxable income is less than the basic amount, the non-refundable medical tax credit is wasted. However, she is entitled to a refundable medical expense supplement of $121, calculated as 25% of $484. She will claim this credit on Line 452. Note that if Mary had not had any employment income, she would not have been eligible for the credit. This is because she would not have met the earned income requirement.



The Disability Amount and Nursing Home or Attendant Care Now that you have studied the claims that can be made at Lines 316, 318 and 326 for the disability amount; for attendant care expenses at Line 215 or 330; and for nursing home care at Line 330; it is time to review the interrelationships between these claims. Illustration 8.21 on the next page summarizes the major points, and these are tabulated in Illustration 8.20 below. Review these carefully, then study the example in Illustration 8.22.

Illustration 8.20

The Interrelationships of Claims If a disabled taxpayer has:

Attendant care expenses Nursing home expenses

And makes a claim for

As a disability support on Line 215

$10,000 or less on Line 330

More than $10,000 on Line 330

Nursing home expenses on Line 330

Can the disability amount be claimed?

Yes Yes No No



Illustration 8.21

Nursing Home, Attendant Care and the Disability Amount 1. To claim care in a nursing home as a medical expense, the patient must be

disabled (i.e., have a Form T2201) or must be certified by a qualified person as being dependent on others for care because of a physical or mental handicap.

If the cost of care in a nursing home is claimed as a medical expense at Line 330, then no one may claim a disability amount for the patient, even if he or she is disabled. (Of course, this is not an issue if the patient is in the nursing home because of a physical or mental handicap or infirmity and not because of a disability.)

2. To claim expenses for attendant care as a medical expense, the person must be disabled (i.e., have a Form T2201) or be certified by a medical practitioner as being dependent on others for personal needs and care for a prolonged and indefinite period because of a mental or physical infirmity.

If $10,000 or less of attendant care expenses are claimed as a medical expense, the disability amount claim is not affected. However, if more than $10,000 of attendant care expenses are claimed as a medical expense, no one may claim a disability amount for the patient.

3. To claim attendant care as a deduction at Line 215, the taxpayer must be disabled, and the cost of the care must have been incurred in order to work, conduct research, or attend a designated educational institution. A disability supports deduction at Line 215 has no effect on the claim for the disability amount. However, the claim is limited to earned income if incurred in order to work or conduct research. If incurred to attend a designated educational institution the claim is limited to earned income plus the lesser of (a) $15,000, (b) income from other sources and (c) $375 multiplied by the number of weeks in attendance at the school or educational institution.

4. Qualifying attendant care expenses may be claimed at either Line 215 or Line 330, but the expense may not be split between the two lines.

5. While a claim for attendant care or nursing home expenses as medical expenses may affect a claim for the disability amount, claims for other medical expenses (such as the cost of prescriptions, eyeglasses, dental work, etc.) have no effect on the disability amount claim.

6. The disability amount and the medical expense claim are non-refundable credits calculated at 15%. The disability supports deduction (at Line 215) is calculated at the taxpayer’s marginal federal tax rate (15%, 22%, 26% or 29%). Therefore, the best claim for a given taxpayer may not be immediately obvious; a comparative calculation should always be performed.



Illustration 8.22

Diane is disabled and has a Form T2201 on file with the CRA. She requires the daily assistance of an attendant. Diane wants to know what options are available for claiming the attendant care expenses. If Diane required the assistance of an attendant in order to work, carry on a

business, or conduct research, she could claim attendant care expenses as a disability support on Line 215 in an amount up to her earned income. She could also claim the disability amount.

If Diane required the assistance of an attendant to attend a designated educational institution, she could claim attendant care expenses on Line 215 to the extent of her earned income plus the lesser of $15,000, her income from other sources, and $375 multiplied by the number of weeks in attendance at the school or educational institution. She could also claim the disability amount

If Diane did not incur the attendant care expenses to work, carry on a business, conduct research or attend a designated educational institution she could only claim them as medical expenses and not on Line 215. In this case, if the attendant care expenses are $10,000 or less, Diane can claim them as a medical expense and still claim the disability amount. However, if the attendant care expenses are over $10,000 and the full amount is claimed as a medical expense, the disability claim is not allowed.

Suppose that Diane’s attendant care expenses are $12,000 and she did not incur them in order to work, carry on research or a business, or attend a designated educational institution. In this situation she would not be able to claim them on Line 215, but only as medical expenses on Line 330. Diane decides to claim attendant care expenses of $10,000 on Line 330 and forego the additional $2,000 so that she can make the disability claim of $7,196 on Line 316.

Gasoline Excise Tax Rebate Persons who are medically certified as suffering from permanent mobility impairments to the extent that it is unsafe for them to use public transportation are eligible for a partial rebate of excise tax paid on gasoline. The refund is calculated as 1.5¢ per litre, or 15¢ per 100 kilometres, and is applied for by completing Form XE8 Application for Refund of Federal Excise Tax on Gasoline. The rebate application is not part of the tax return and must be submitted separately.




Summary In this chapter you learned how to claim the disability amount for self or dependants, how to claim medical expenses and attendant care expenses, and the relationship between these claims.


Disabled taxpayers may claim the disability amount for themselves without regard to income.

Disabled taxpayers under 18 may be eligible for a disability supplement. To claim the disability amount, taxpayers must have Form T2201 completed by

a qualified person, certifying that they meet the necessary conditions. Unused disability amounts may be transferred to a supporting person. A Registered Disability Savings Plan is available to allow funds to be

accumulated for the care of disabled taxpayers. Medical expenses paid on behalf of a spouse or common-law partner may be

claimed without regard to the spouse’s or partner’s net income. Medical expenses for the taxpayer, spouse or common-law partner and

dependent children may be claimed to the extent they exceed 3% of the taxpayer’s net income.

Medical expenses for other dependants may be claimed to the extent they are paid by the taxpayer, not reimbursed, and exceed 3% of the dependant’s net income (to a maximum of $10,000 claim per dependant).

Medical expenses may be claimed for any 12-month period ending in the tax year, except in the year of death when the claim is limited to a 24-month period including the date of death.

Only those medical expenses outlined in the Income Tax Act can be claimed. Disabled person who meet specified criteria may claim attendant care and other

disability related expenses on Line 215. A refundable medical expense supplement is available to low-income taxpayers

with medical expenses or disability supports. To qualify, the person must have at least $3,116 of net income from employment or self-employment.

The disability amount may not be claimed or transferred if anyone claimed the following medical expenses (Line 330) for the individual: nursing home expenses, or attendant care expenses over $10,000. A claim for attendant care expenses as a disability support on Line 215 does not affect the disability claim.



Chapter 9 – Registered Plans

Introduction There are several different types of plans registered with the Canada Revenue Agency; this chapter focuses on Registered Retirement Savings Plans (RRSPs). It also explains the Home Buyers’ Plan, the Lifelong Learning Plan, Tax-Free Savings Accounts and the first-time Home Buyers’ Amount, introduced in 2009. Income from RRSPs, and how such income is reported, is covered in Chapter 12.


List the factors that affect a taxpayer’s RRSP deduction limit; Claim allowable RRSP deductions on the T1; Explain the rules governing the Home Buyers’ Plan and calculate the required

annual repayment; Explain the rules governing the first-time Home Buyers’ Tax Credit and claim

the non-refundable credit; Explain the rules governing the Lifelong Learning Plan and calculate the

required annual repayment; and Summarize the rules regarding Tax-Free Savings Accounts.

196 Chapter 9 – Registered Plans


Glossary Before you read this chapter, review the following terms in the glossary: Annuitant Deferred profit sharing plan; Earned income for RRSP purposes; Past service pension adjustment; Pension adjustment; Pension adjustment reversal; Registered pension plan; Registered retirement savings plan; and Tax Free Savings Account



Registered Retirement Savings Plans A registered retirement savings plan (RRSP) is a retirement savings plan registered with the CRA. Individuals may set up RRSPs with insurance companies, banks, trust companies, mutual funds, or other licensed issuers. Contributions to RRSPs may be invested in a variety of instruments such as term deposits, GICs, stocks, bonds, mutual funds, or T-Bills. The investment instruments available vary with the institution and the type of RRSP. The Income Tax Act restricts what types of investments an RRSP can hold. For example, an RRSP may not invest in real property, commodities, collectibles, uninsured mortgages on property owned by the RRSP annuitant and stocks listed on stock exchanges that are not “designated” in the Act. Beginning in 2007, any investment grade debt also qualifies provided it is part of an issuance of at least $25 million. An RRSP is an excellent tax deferral mechanism suitable for the average taxpayer. Eligible RRSP contributions are deducted directly from income reported on the tax return, which means that contributors save taxes at their current-year tax rates. In addition to the initial tax savings received when contributions are made, all income earned by investments within an RRSP accumulates tax-free until it is withdrawn. Because the income earned by an RRSP accumulates tax-free, the capital grows more rapidly than capital invested outside an RRSP. This creates a larger investment fund to provide income for retirement or other purposes. RRSP funds are generally not taxable until paid out to or withdrawn by the taxpayer. The intent is that funds be withdrawn upon retirement, usually by way of annuity or other form of periodic payment. However, the funds may, in fact, be withdrawn at any time and used for other purposes. The important thing to remember is that all funds withdrawn are usually subject to tax. Therefore, it is wise to seek tax advice before making withdrawals, especially if the amounts involved are large. Withdrawals from an RRSP are recorded on a T4RSP slip; the reporting of such income is discussed in Chapter 12. In this chapter we focus instead on the deductions allowed when the contributions are made.

RRSP Contributions Individuals may contribute either to an RRSP where they are the annuitant or to a “Spousal or common-law partner RRSP” where their spouse or common-law partner is the annuitant of the plan. No matter which kind of plan they contribute to, they may claim deductions for their contributions up to their maximum allowable RRSP deduction limits for the year. All contributions made between March 3, 2009 and March 1, 2010 must be reported on the 2009 tax return. Contributions may be deducted in the year in which they are made, or may be carried forward and deducted in any subsequent year. In addition, RRSP contributions made in the first sixty days of a taxation year can be deducted on the prior year’s return.



Taxpayers may make contributions to their own RRSPs until the end of the year in which they turn 71, or to spousal or common-law partner RRSPs until the end of the year in which the spouse or common-law partner turns 71.

Deduction Limit A taxpayer’s RRSP deduction limit for a given year is equal to: the taxpayer’s unused deduction room carried forward + 18% of the taxpayer’s prior year earned income, to a maximum ($21,000 for 2009); – the taxpayer’s pension adjustment for the prior year; + the taxpayer’s pension adjustment reversal for the current year; – the taxpayer’s past service pension adjustment for the current year. The calculation, as well each of the terms involved in the calculation, is discussed below.

Unused Deduction Room Carried Forward Most taxpayers do not contribute the maximum allowable amount to their RRSPs each year. Fortunately, any portion of a taxpayer’s deduction limit that is not used in a given year is carried forward and can be used in subsequent years. The carry forward is calculated by subtracting the amount deducted on the prior year return from the prior year deduction limit.

Illustration 9.1

Marc’s RRSP deduction limit last year was $4,000. On his last year’s return, he deducted $2,500 on Line 208. If Marc had no unused deduction room carried forward from prior years, his unused deduction room carried forward would be $1,500, calculated as $4,000 minus $2,500.

Earned Income Earned income for RRSP purposes consists of the following: employment income on Lines 101 and 104; net income from a business reported on Lines 135 to 143; disability payments reported on Line 152; net rental income reported on Line 126; and taxable support payments reported on Line 128. The total of the above income is reduced by the following losses or deductions: union, professional or like dues deducted on Line 212; employment expenses deducted on Line 229; net loss from a business reported on Line 135 to 143;



net rental loss reported on Line 126; deductible support payments claimed on Line 220. You have already encountered most of the types of income and deductions that make up earned income; others are discussed in later chapters or in the optional segments of the course. Once earned income is determined, it is multiplied by 18% to determine the limit based on earned income. However, this amount may not exceed the annual dollar limit, which is set at $21,000 for 2009.

Illustration 9.2

Marc, from Illustration 9.1, had $30,000 employment income last year, and paid $500 in union dues. His earned income for RRSP purposes is therefore $29,500, calculated as $30,000 minus $500. His limit based on earned income is $5,310, calculated as 18% of $29,500.

Pension Adjustment (PA) The pension adjustment (PA) is calculated by employers and shows the value of RPP or DPSP benefits accrued in the taxation year. It is shown in Box 52 of a T4 slip or in Box 34 of a T4A slip, and is reported by taxpayers on Line 206. PAs are subtracted from taxpayers’ RRSP deduction limits in order to equalize opportunities for retirement savings between taxpayers who have pension plans and those who do not.

Illustration 9.3

Marc’s PA for last year was $3,000. Marc’s RRSP deduction limit for this year is therefore $3,810, calculated as follows: Unused deduction room carried forward $1,500 Plus: 18% of last year’s earned income 5,310 Minus: last year’s PA Current RRSP Limit $3,810

–3,000

Pension Adjustment Reversal (PAR) A pension adjustment reversal (PAR) results when an employee leaves a DPSP (deferred profit sharing plan) or RPP (registered pension plan) before retirement and receives reduced pension benefits as a result. The PAR restores a taxpayer’s RRSP deduction room to compensate for the loss of RPP or DPSP benefits. The PAR is reported to the taxpayer in Box 2 of a T10 slip issued by the employer. A taxpayer’s current-year PAR increases his/her RRSP deduction limit for the year.



Past Service Pension Adjustment (PSPA) The past service pension adjustment (PSPA) measures the value of benefits accrued to the person’s RPP as the result of either: benefit upgrades provided by the employer for prior years of service after 1989;

or additional periods of pensionable service after 1989 purchased by the employee. In either of these two situations, the PSPA is calculated by the pension plan administrator and reported to the taxpayer on Form T215 or T1004. Note that a PSPA can only arise in respect of benefits for past service after 1989, so if the benefit upgrades or additional pensionable service relates to a period before 1990, a PSPA will not result. A taxpayer’s current year (PSPA) reduces his/her deduction limit for the year.

Deduction Limit from Notice of Assessment In most cases taxpayers do not need to calculate their own deduction limits. This is because the CRA shows each person’s current-year deduction limit on the Notice of Assessment for the preceding year. For example, 2009 deduction limits were reported on the 2008 Notices of Assessment. Even though it is not necessary to perform the calculation manually, it is useful to know what factors affect it for tax planning purposes. For example, because RRSP limits are based on prior year earned income as reported on a tax return, it may be useful for taxpayers with earned income to file returns even if not otherwise taxable. This enables them to build up RRSP room for future years when they do expect to be taxable.

Illustration 9.4

Joan started working part-time when she was sixteen. She earned $4,000 each year and, even though not required to do so, she filed a tax return each year. As a result, when she graduates from university this year at age 22, she will have over $4,000 of accumulated RRSP deduction room. She can use this to shelter some of her earnings when she begins her full-time career, or she can save it for later on when her tax bracket is even higher.

Taxpayers who do not have their Notice of Assessment can find their RRSP limit by calling the T.I.P.S. hotline at 1-800-267-6999.





Claiming the RRSP Deduction An RRSP contribution may be claimed on the tax return for any of the following years, if the taxpayer’s deduction limit allows: the taxation year in which it is made; the immediately preceding taxation year if it is made in the first sixty days

immediately following the taxation year; or any subsequent taxation year.

Illustration 9.5

In February 2010, Connie made an RRSP contribution of $3,000. Connie must report the contribution on her 2009 tax return but she can deduct the contribution in any of the following years, if her deduction limit for the year allows: • 2010 (because that is the taxation year in which it was made); • 2009 (because it was made in the first sixty days immediately following); or • any subsequent taxation year.

The claim is made by deducting the desired amount on Line 208. The claim must be supported by an official RRSP receipt issued by the institution holding the RRSP. The CRA will not accept a statement of account or the application for registration in place of the official receipt. A photocopy of the official receipt is acceptable only if the issuer certifies that it is correct.

Undeducted RRSP Contributions Taxpayers sometimes make RRSP contributions which exceed the amount they can or wish to deduct for the year. Some taxpayers make such contributions deliberately, so that their money can compound tax-free inside the plan. Others do so inadvertently, because they are not aware of their RRSP limits. Any contribution which is not deducted in the year it is contributed, or in the immediately preceding year, is called an undeducted contribution. Undeducted RRSP contributions, like unused deduction room, may be carried forward indefinitely. Such contributions can then be deducted in a future year. Contributions made in the period that begins 61 days after the taxation year begins to 60 days after the taxation year ends should be reported even if they are not deducted on the return. Undeducted contributions are tracked using Schedule 7 RRSP Unused Contributions, Transfers, and HPB or LLP Activities.

Schedule 7



Illustration 9.6

Alice has a deduction limit of $2,000 for the year. She made an RRSP contribution of $4,000 in December, but deducted only $1,000 of it. She wants to save $3,000 for the following year when she expects her income to be higher. Since Alice has an undeducted contribution, she must complete Schedule 7, the relevant section of which is shown below:

RRSP Excess Contributions To prevent taxpayers from taking unfair advantage of tax-free compounding inside RRSPs, a penalty tax is assessed on undeducted contributions if, at any given time, they exceed the taxpayer’s deduction limit by more than a specified amount. Undeducted RRSP contributions which exceed a taxpayer’s deduction limit at a given point in time are called excess contributions.



Illustration 9.7

Alice (from Illustration 9.6) has an undeducted contribution of $3,000, according to her Schedule 7. However, her excess contribution for December is only $2,000, because this is the amount which exceeds her deduction limit at that point in time.

In other words, a contribution is an excess contribution only to the extent it cannot be deducted in the year contributed or, for contributions made in the first sixty days of the year, in the immediately preceding year. If the taxpayer could have deducted it, but simply chose not to do so, it is an undeducted contribution, not an excess one. The amount of an excess contribution automatically changes whenever a taxpayer’s deduction limit changes because of new deduction room opening up.

Illustration 9.8

Assume that Alice’s deduction room for the following year is $1,500. This, added to her previously unused deduction room, gives her a total limit of $2,500. This reduces her excess contribution from $2,000 for the month of December, to $500 for the month of January.

The tax consequences of making an excess contribution depend on the amount of the contribution and the age of the contributor. Taxpayers who are nineteen years of age or over are allowed to have excess contributions of up to $2,000 without incurring a penalty. Excess contributions greater than $2,000 are subject to penalty tax of 1% per month. Taxpayers under 19 are subject to a penalty tax of 1% per month on all excess contributions; there is no $2,000 “cushion.” The effect of the cushion is to allow taxpayers to contribute up to $2,000 over their RRSP deduction limits without being subject to the 1% per month penalty tax. The intent is to allow taxpayers to maximize their RRSP contributions without worrying about inadvertently triggering penalties. Excess contributions are calculated on a cumulative basis, since the amount can rise or fall during the year, as RRSP contributions are made or withdrawn, or as new deduction room opens up.

Withdrawal of Undeducted Contributions Although undeducted contributions may be carried forward indefinitely to be deducted in subsequent years, there are times when it may be beneficial for a taxpayer to withdraw them instead. This option is particularly useful to those who happen to exceed the $2,000 excess limit and thus become subject to penalty tax. Since all withdrawals (whether they were ever deducted or not) must be included in income, this means that withdrawals of undeducted contributions are, in effect, taxed twice.



To alleviate this problem, taxpayers are allowed, in certain specified situations, to claim offsetting deductions for such withdrawals on Line 232. There are two ways in which to carry this out: The taxpayer may withdraw the undeducted amount without having tax

withheld at source by filing Form T3012A. The CRA “approves” this form after it is sent to them; then the financial institution issues a T4RSP showing the amount withdrawn. The T3012A must be attached to the return to support the deduction made on Line 232.

Alternatively, the amount can be withdrawn without using Form T3012A, in which case tax is withheld. In this case, Form T746 must be filed to claim the offsetting deduction.

The offsetting deduction is allowed only if the taxpayer: reasonably expected that the RRSP contribution could be fully deducted for the

year contributed or for the immediately preceding year; did not make the contribution with the intention of subsequently withdrawing it

and deducting an offsetting amount; and withdraws the contribution no later than the year immediately following the

year the Notice of Assessment was received for the year in which it was made.


Spousal or Common-law Partner RRSPs Taxpayers can make contributions to spousal or common-law partner RRSPs as well as their own. Contributions to spousal or common-law partner RRSPs become the property of the spouse or common-law partner, but the contributors may deduct them on their own tax returns. This enables taxpayers to transfer money to a spouse or common-law partner without attribution (provided the money is left in the plan for the prescribed length of time) and get a tax deduction besides. If the annuitant spouse or partner leaves the money in the plan until it is converted into retirement income, it may allow some retirement income to be taxed in the hands of a spouse or common-law partner in a lower tax bracket. Hence spousal or common-law partner RRSPs offer a number of tax benefits and opportunities for tax planning. Spousal or common-law partner contributions, however, do not increase a person’s total allowable deduction. Whether taxpayers contribute to their own plans, to spousal or common-law partner plans, or to a combination of both, the amounts they can deduct are limited by their own personal deduction limits. For example, a taxpayer with an RRSP deduction limit of $6,500 who deducts $6,000 for contributions to a spousal or common-law partner RRSP may then deduct only $500 for contributions to a personal RRSP. Contributions can be made to a spousal or common-law partner RRSP until the end of the year in which the spouse or common-law partner turns seventy-one. This means that taxpayers who are too old to contribute to their own RRSPs may still be able to make contributions to their spouse’s or common-law partner’s RRSPs.



When amounts are withdrawn from a spousal or common-law partner RRSP, that income may be considered to be income of the contributor. Details are discussed in Chapter 12.

Canada Savings Bonds Canada Savings Bonds have always been qualified investments for RRSPs but, until 1995, taxpayers could not hold CSBs in their RRSPs unless they had “self-directed” plans (that is, RRSPs in which the taxpayers themselves determine the investments held in the plan, rather than simply subscribing to a plan offered by an institution). However, taxpayers are now able to register their compound-interest bonds for RRSP purposes without setting up self-directed RRSPs. Taxpayers who register their bonds will be issued RRSP receipts for the face value of the bonds (plus any accrued interest, if applicable). They can claim a deduction for these amounts on Line 208. Once they are registered for RRSP purposes, interest earned on bonds is no longer taxable. However, if the bonds are deregistered, the principal amounts and any accrued interest will be fully taxed just as with any other RRSP withdrawals.

RRSP Transfers The Income Tax Act provides that certain amounts included in a taxpayer’s income may be transferred to his or her RRSP or RPP without being subject to the usual deduction limits. These transfers are discussed in Chapter 12.

2009 General Income Tax and Benefit Guide, pages 22and 23


The Home Buyers’ Plan Although RRSPs are intended primarily as retirement savings vehicles, the government allows first-time home buyers to withdraw up to $20,000 or $25,000 if purchased after January 27, 2009 from their RRSPs to finance the purchase or building of a principal residence. The withdrawals may be made tax-free, providing certain rules are followed. However, the tax deferral is only temporary: the money must be repaid to the RRSP over a period of 15 years, beginning the second year after withdrawal. If the money is not repaid as required, the amount will be added to income. The rules for the Home Buyers’ Plan are described in detail below.

Home Buyers’ Plan Withdrawals Home Buyers’ Plan withdrawals must meet certain conditions to be eligible. These conditions are important because otherwise the withdrawal is taxable. The conditions are listed below:



Only first-time home buyers are eligible to participate. A person is a first-time home buyer if neither the person nor his or her spouse or common-law partner owned a home and lived in it as a principal residence in the period beginning January 1 of the fourth calendar year preceding the year of withdrawal (January 1, 2005 for a 2009 withdrawal) and ending 31 days prior to the withdrawal.

The “first-time” rule does not apply to a person who is disabled, or who has a disabled relative, and who is acquiring a home that is more accessible to, or better suited to the needs of, the disabled person.

Taxpayers may participate more than once, provided the balance under their previous Home Buyers’ Plan is zero as of January 1 of the year in which they wish to make the new withdrawal. However, this does not waive the (approximate) five-year period of non-ownership described above.

The taxpayer must have already entered into a written agreement to buy or build a qualifying home before withdrawing the RRSP funds. A qualifying home is one which is: located in Canada; not previously owned by the taxpayer or the taxpayer’s spouse or common-

law partner; and intended to be occupied as the taxpayer’s principal place of residence within

one year of purchase or construction. Form T1036 Applying to Withdraw an Amount Under the Home Buyers’ Plan

must be submitted to the RRSP issuer when requesting the withdrawal. This form is important, because without it, the withdrawal will be taxed like an ordinary withdrawal.

The qualifying home may be acquired no earlier than thirty days before receiving the RRSP funds.

The qualifying home, or a replacement property, must be acquired no later than October 1 of the year following the year of withdrawal.

The withdrawals do not all have to be made at the same time, but ordinarily they must all be made in the same calendar year.

The taxpayer must be a resident of Canada at the time the funds are received and must remain a resident until the time the qualifying home is acquired.

Assuming the withdrawal is made pursuant to the completion of Form T1036, no tax will be withheld at source, and no amount is included in income. However, the withdrawal is reported in Box 27 of a T4RSP slip and is entered on Line 15 at the bottom of Schedule 7. If the taxpayer’s address on the return is the same as the address of the home purchased under the HBP, Box 16 should be checked. If the agreement to purchase or build a qualifying home subsequently falls through, the taxpayer may still keep the money while looking for a replacement property within the prescribed time period. Alternatively, the taxpayer can return the money to the RRSP without tax consequences if he or she does so by December 31 of the year following the year of withdrawal.



If the taxpayer neither acquires a qualifying home nor returns the funds, the withdrawal will be treated as an ordinary taxable withdrawal in the year withdrawn. This may require reassessment of the previous year’s return. For couples, if both partners have RRSPs, each can withdraw the maximum amount.

Illustration 9.9

In April, Buster and Naomi made an offer to purchase their first home, at 393 Park Point. Their bank told them they needed a down payment of $35,000 to obtain financing. They didn’t have any money in the bank, but they did have RRSPs. They therefore decided to take advantage of the Home Buyers’ Plan. Both Buster and Naomi completed a T1036 naming 393 Park Point as the address of the qualifying home and gave the forms to the trust company which holds their RRSPs. Naomi requested a withdrawal of $20,000, and Buster withdrew $15,000. Buster and Naomi must acquire the house before October 1 of the following year. This means that the sale must be closed and the transfer of title registered before that date. They must also intend to begin using the house as their principal place of residence not later than one year from the date they actually acquire it. If the agreement to purchase the house falls through before the sale is closed, Buster and Naomi have the choice of either acquiring another qualifying home before the October deadline, or returning the funds to their RRSPs by December 31 of the following year.

RRSP Contributions Made Within the Withdrawal Period The intention of the Home Buyer’s Plan is to allow taxpayers to use funds already inside their RRSPs to finance a home purchase. To prevent taxpayers from depositing funds already accumulated for a down payment into their RRSPs, claiming the tax deduction, then immediately withdrawing that same money to buy a home, an 89-day waiting period has been imposed for such transactions. Taxpayers who make an RRSP contribution to a personal or spousal or common-law partner RRSP from which a Home Buyers’ withdrawal is made will be denied a deduction in respect of that contribution if it is made less than ninety days prior to the withdrawal. However, this prohibition applies only to the extent that the RRSP balance after the withdrawal is less than the amount of the contributions made during the ninety-day period.



Illustration 9.10

Greg made an RRSP contribution of $5,000 in January 2009 which he intended to deduct on his 2008 return. In February 2009, however, he suddenly decided to buy a house. He withdrew $25,000 from the same RRSP for a down payment. Since Greg made an RRSP contribution to the same RRSP in the 89 days prior to his Home Buyer’s withdrawal, the amount of his deduction may be restricted. To determine this, it is necessary to know the RRSP balance in the plan after the withdrawal. Greg called the bank and was informed that his RRSP balance after the withdrawal was $4,200. This means that only $4,200 of his contribution is deductible.

Illustration 9.11

On April 1 George had $10,000 in his RRSP. The same day, he made a contribution of $5,000, increasing the total to $15,000. On May 1 the RRSP was credited with $1,000 in earnings, increasing his balance to $16,000. If George makes a Home Buyers’ withdrawal from the plan after June 29, his RRSP deduction will not be affected, no matter how much he withdraws. This is because the withdrawal will be made at least 89 days after making his RRSP contribution on April 1. If George makes a Home Buyers’ withdrawal from the plan before June 30, however, he will be denied a deduction for his RRSP contribution on April 1 to the extent that it exceeds his RRSP balance after making the withdrawal. Therefore: If George makes a withdrawal of $11,000 or less, no tax consequences will

result. This is because his RRSP balance after the withdrawal will still be $5,000 or more.

If George makes a withdrawal of more than $11,000, part of his contribution will be non-deductible. For example, if he withdraws $12,000, his balance will be only $4,000 after the withdrawal ($16,000 – $12,000). Because his contribution exceeds his new balance by $1,000 ($5,000 – $4,000), he will be denied a deduction for that amount.

A contribution that is deemed non-deductible by virtue of this rule remains non-deductible in future years as well; that is, it cannot be carried forward and claimed in a future year instead. The deduction denial rule applies only to those plans from which the Home Buyers’ withdrawals were made, not to any other plans the taxpayer may have.



Illustration 9.12

Allen has two RRSPs. He has $5,000 in RRSP No. 1, and $15,000 in RRSP No. 2. He made a contribution of $10,000 to RRSP No. 2 within the ninety-day period before making a Home Buyers’ Plan withdrawal of $20,000. If Allen withdraws the entire $20,000 from RRSP No. 2, then $5,000 of his RRSP contribution will be rendered non-deductible. This is because his contribution would exceed the balance in RRSP No. 2, after making the withdrawal, by this amount ($10,000 – $5,000). However, if Allen withdraws $5,000 from RRSP No. 1, and only $15,000 from RRSP No. 2, the contribution will not exceed the balance in RRSP No. 2 and the full amount will be deductible.

The deduction denial rule also applies to contributions made to a spousal or common-law partner RRSP from which the annuitant spouse or common-law partner has made a withdrawal under the Home Buyers’ Plan.

Repayments Participants in the Home Buyers’ Plan must begin making repayments within sixty days of the end of the second year following the year in which the withdrawal was made. For example, taxpayers who withdraw funds anytime in calendar year 2009 must make their first repayment by March 1, 2012. The amount withdrawn must be paid back within a fifteen-year period. Accordingly, the minimum repayment each year is based on the outstanding balance, with 1/15 being due the first year, 1/14 the second year, and so on. Taxpayers need not calculate the amount due, as they are provided with a statement each year indicating the minimum payment required. Although a minimum amount must be repaid each year, a taxpayer can choose to pay back more. Repayments are made very simply by contributing the money to any RRSP of which the taxpayer is the annuitant (i.e., not a spousal or common-law partner RRSP). It does not have to be made to the same RRSP from which the Home Buyers’ withdrawal was originally made. The taxpayer receives an ordinary RRSP receipt for the contribution, as the repayment is not actually designated as such until the tax return for the year is filed. At the time the return is filed, the taxpayer uses Schedule 7 to indicate (on Line 6) what, if any, portion of RRSP contributions made during the year (and within the first sixty days of the following year) is to be treated as a repayment. The amount designated as a repayment is subtracted from the total contributions and cannot be deducted on Line 208. If a taxpayer pays back less than the required amount in a given year, the shortfall must be reported as income on Line 129 for that taxation year. If the taxpayer neglects to include any shortfall on Line 129, the CRA will do so when the return is assessed. Because any shortfall is included in income, the minimum payment for the next taxation year is calculated as though the total required payment was made.



If a taxpayer repays more than the minimum annual payment, the outstanding balance is reduced and lower annual payments are required in subsequent years. Taxpayers, who by virtue of the rule requiring them to close their RRSP account and transfer it to a RRIF or similar annuity when they reach 71 years of age, will take into income at line 129, each year after the transfer, the amount they would ordinarily have to repay to their RRSP. Depending on their income and tax situation for subsequent years, an option to repay a larger amount before turning 71 may be considered. Earlier repayments are required in the following circumstances: the individual dies and there is no surviving spouse or common-law partner, or

the surviving spouse or common-law partner does not elect to continue the payments; or

the taxpayer emigrates from Canada.

Illustration 9.13

Ed withdrew $12,000 from his RRSP under the Home Buyers’ Plan and used the money to purchase a qualifying home. The minimum amount of his first repayment is $800 (calculated as $12,000 ÷ 15). If Ed repays this exact amount by the required date, his outstanding balance is reduced to $11,200 and the minimum amount of his second repayment will also be $800 (calculated as $11,200 ÷ 14). If Ed repays only $600 of the required $800, the shortfall of $200 will be added to his income. His balance therefore will be reduced by the full $800, which means that his minimum repayment for the following year will still be $800. However, if Ed decides to repay $1,500 instead of $800, his outstanding balance will be reduced to $10,500 and his minimum repayment for the following year will be $750 (calculated as $10,500 ÷ 14). Assume Ed made an RRSP contribution of $1,000. He wants to designate $800 of this amount as a Home Buyers’ Plan repayment, and use the rest as a deduction on Line 208. Ed’s Schedule 7 is shown in Illustration 9.14.

First-time Home Buyers’ Tax Credit Beginning in 2009, first-time home buyers may claim a non-refundable credit of $5,000 in respect of the purchase of a qualifying home. The tax savings will be $750 calculated as $5,000 x 15%. A “qualifying home” has the same definition as for the purposes of the RRSP Home Buyers’ Plan. To qualify as a “first time home buyer” a taxpayer must have not owned and lived in another home either in the year of purchase or any of the four proceeding years. If married or living common-law then the married or common-law partner may have previously owned a home and the taxpayer would still qualify as long as he or she did not live in it while they married or living in a common-law relationship.



The claim is entered on Line 369 of Schedule 1. The claim can be split between the taxpayer and the taxpayer’s spouse or common-law partner but the combined total cannot exceed $5,000. If more than one individual is entitled to the amount, the total of all amounts claimed cannot exceed $5,000.

Schedule 1


Lifelong Learning Plan Taxpayers may withdraw funds from their RRSPs tax-free to finance their own education or that of their spouses or common-law partners. This program, which is similar in many ways to the Home Buyers’ Plan, is called the Lifelong Learning Plan (LLP). Under the LLP, taxpayers may withdraw up to $10,000 in a calendar year, to a maximum of $20,000 over a period of up to four calendar years. At the time of withdrawal, the person on whose behalf the withdrawal was made must be enrolled as a full-time student in a qualifying educational program of at least three months duration, or must receive an offer to enroll in such a program before March of the following year. The amount withdrawn under the LLP for the year is shown in box 25 of the taxpayer’s T4RSP slip, and is entered on Line 17 in the “2009 withdrawals under the HBP and LLP” section of Schedule 7. If the taxpayer’s spouse or common-law partner is the student for whom the funds were withdrawn, box 264 at the bottom of Schedule 7 should be checked. Amounts withdrawn under the LLP must be repaid to the individual’s RRSP over a ten-year period beginning no later than 60 days after the fifth year in which the funds were first received. The required repayment is recorded on Line 7 of Schedule 7 and is based on the outstanding balance, with 1/10 being due the first year, 1/9 the second year and so on. Earlier repayments are required in the following circumstances: The individual fails to complete the program; the individual does not qualify for a full-time education amount in at least three

months in each of two consecutive years in the four years following the withdrawal;

the individual dies and there is no surviving spouse or common-law partner, or the surviving spouse or common-law partner does not elect to continue the payments; or

the taxpayer emigrates from Canada. As is the case with HBP withdrawals, taxpayers who make an RRSP contribution to a personal or spousal or common-law partner RRSP from which an LLP withdrawal is made will be denied a deduction in respect of that contribution if it is made less than ninety days prior to the withdrawal.



However, this prohibition applies only to the extent that the RRSP balance after the withdrawal is less than the amount of the contributions made during the ninety-day period.


Complete Q6 to Q8.

Illustration 9.14

Tax-Free Savings Accounts Beginning in 2009, taxpayers over the age of 17 and a resident of Canada may contribute up to $5,000 each year to a Tax-Free Savings Account (TFSA). The annual limit is to be indexed to the inflation rate rounded to the nearest $500 increments. Therefore the limit will be $5,000 for 2010 and 2011 but will increase to $5,500 in 2012.



If a taxpayer’s contribution room is not used in one year it may be carried forward to the next year to allow for a larger contribution in that year. CRA will notify all taxpayers of their contribution limit on their Notice of Assessment but you are not required to file a tax return in order to create contribution room. There are some similarities and some differences between TFSAs and RRSPs. Contribution room in a TFSA isn’t linked to earned income as it is for an RRSP; the contribution room is a flat amount per year. Unlike the RRSP, contributions to a TFSA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor are they included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit.

Illustration 9.15

In 2009, David contributed $2,000 to his TFSA. In 2010, David was not able to contribute to his TFSA but instead withdrew $1,000 to pay some extra expenses. David’s contribution room for 2010 is $7,000. ($5,000 + $3,000 from 2009) David’s contribution room for 2011 is $13,000. ($5,000 + $7,000 + $1,000)

Withdrawals The TFSA is flexible in that when a taxpayer withdraws funds from a TFSA, those withdrawals will be added to the taxpayer's contribution room in the following year thereby allowing full access to the funds in the account with no penalty for withdrawal. However, like the RRSP, excess contributions are subject to a 1% per month penalty tax. The penalty will be calculated on the highest excess amount and charged monthly until the excess amount is removed.

TFSA Investments

The same rules for eligibility of investments within an RRSP apply to investments within a TFSA. Like RRSPs, the costs of borrowing to invest in a TFSA are not deductible.

Illustration 9.16

Alison decided a TFSA would be a great way to start saving to purchase a new home so contributed $5,000 in February of 2009. Later in the year she put a bid in to purchase the home and withdrew the $5,000 as a down payment but the deal fell through. Alison must wait until the beginning of 2010 to deposit the $5,000 in her TFSA. If she does so earlier she will be subject to the 1% penalty tax for over contribution.



Summary

In this chapter you learned the rules governing RRSP contributions, the Home Buyers’ Plan, the first-time Home Buyers’ Tax Credit, the Lifelong Learning Plan, TFSA and how to complete Schedule 7.


Taxpayers can defer tax by contributing funds to their own RRSPs, or to a spousal or common-law partner RRSP.

Taxpayers may contribute to their own RRSPs until the end of the year in which they turn 71. They can contribute to a spousal or common-law partner RRSP until the end of the year in which the spouse or common-law partner turns 71.

The amount that can be deducted is limited by the contributor’s RRSP deduction limit, which is based on a number of factors, including prior year earned income. The limit is shown on each taxpayer’s Notice of Assessment for the prior year.

Unused deduction room can be carried forward to the following year. Taxpayers who contribute more than their limit may be subject to penalty

tax. There is a $2,000 “cushion” for taxpayers over 18. Undeducted contributions may be carried forward and deducted in a future

year. Undeducted contributions may also be withdrawn. Under certain conditions,

a deduction for the withdrawal may be claimed on Line 232 by filing Form T3012A or T746.

Under the Home Buyers’ Plan, first-time home buyers may withdraw funds from their RRSPs tax-free to buy a home. The withdrawal is recorded on Schedule 7, but is not included in income. Repayments may be extended over a 15-year period, and are recorded on Schedule 7.

Beginning in 2009, first-time home buyers are eligible for the Home Buyers’ Tax Credit (HBTC), a non-refundable tax credit of $5,000.

Under the Lifelong Learning Plan, taxpayers may withdraw funds from their RRSPs tax-free to finance their own education or that of their spouse or common-law partner. The withdrawal is recorded on Schedule 7, but is not included in income. Repayments may be extended over a 10-year period, and are recorded on Schedule 7.

Canadian residents, over the age of 17, may contribute up to $5,000 per year to a Tax-Free Savings Account. Contributions to a TFSA are not tax deductible, and any unused contribution room is carried forward each year.



Chapter 10 – Taxation and Family Situation

Introduction This chapter builds on information already learned about family and dependants in Chapter 4. There we dealt with certain tax credits as they affected families that remain stable throughout the year. In this chapter we expand our discussion to include what happens in the year of marital status change (e.g., marriage or separation). We then examine the tax treatment of support payments that often arise as a result of separation. We also address two topics of importance to families with children: adoption expenses and child care expenses. Finally, we discuss how a change in marital status during the year affects the claiming of personal amounts, the GST/HST credit and the Canada Child Tax Benefit and Universal Child Care Benefit.


Determine when support payments are taxable to a recipient and deductible by a payer and enter the correct information on the T1;

Determine the eligibility for claiming adoption expenses; Summarize the rules and limitations regarding child care expenses; Complete Form T778 for a taxpayer and/or another supporting person, and claim

the deduction(s) on the T1; Apply the rules for claiming the amount for children under the age of 18; and Explain the effects of marital status changes on a taxpayer’s eligibility for

various personal amounts, the GST/HST credit, the Canada Child Tax Benefit and Universal Child Care Benefit.



Getting Married or Establishing a Common-law Relationship The tax consequences of getting married are the same as establishing a common-law relationship. At this time, take a few minutes to review the definition of common-law partner in Chapter 4 so that you are clear on when a common-law relationship actually begins for tax purposes. As we go through the chapter, we will discuss the effect that getting married or establishing a common-law relationship during the year has on claims for child care, personal amounts, the GST/HST credit, and the Canada Child Tax Benefit and Universal Child Care Benefit. At the time of marriage, the female partner may change her surname. In the case of a name change, as a result of marriage or otherwise, enter the new name in the identification area of the return. If the return is electronically filed, you must also answer “Yes” to the change of name question. Remember to tick “married” or “living common law” for couples who get married or establish a common-law relationship during the year.

Separation in the Year For tax purposes, a separation occurs when a conjugal relationship breaks down and the spouses or common-law partners subsequently live apart. It is important to note that a separation for reasons other than a breakdown of the relationship is not considered to be a separation for tax purposes (e.g., a separation because of work, illness, or that is contrived primarily to obtain a tax advantage). Separations may be formalized by a court order or written agreement, or they can occur by mutual consent or desertion without a written agreement. After separation, the female partner may resume using her maiden name. If so, remember to answer “Yes” to the change of name question if the return is being electronically filed. Also, remember to tick “separated” as the marital status for couples who are separated as of December 31. As we go through the chapter, we will discuss the effect that separation during the year has on claims for support payments, child care, personal amounts, the GST/HST credit, and the Canada Child Tax Benefit and Universal Child Care Benefit. Refer to the “Separation During the Year” chart in your TTS Reference Book, which summarizes the effects of separation on various credits and deductions discussed in the chapter.

Separation during the Year (Chart)

218 Chapter 10 – Taxation and Family Situation


Support Payments Support payments are periodic allowances paid by a taxpayer to a former spouse or common-law partner or parent of the taxpayer’s child, after separation or divorce, for the support of the former spouse or common-law partner, the taxpayer’s children, or both. At one time, support payments were usually taxable to the recipient and deductible by the payer. However, the federal government, in its 1996 budget, introduced a fundamental change to the taxation of child support payments. As a result, child support payments paid under a court order or written agreement made on or after May 1, 1997 are neither taxable to the recipient nor deductible by the payer. However, child support paid under prior agreements will become subject to the revised legislation in the following situations: if the order or agreement specifically states that the revised rules will apply to

child support paid as of a specified date on or after May 1, 1997; if the original agreement is altered or changed on or after May 1, 1997; or if both parties file a joint election to have the revised rules apply. Once the tax treatment of payments has been changed, the parties are not allowed to return to the previous rules. Support payments for former spouses or common-law partners are not affected by the revised legislation. However, to be considered spousal or common-law partner support, an amount must be identified in the order or agreement as being solely for the support of the spouse or common-law partner; where it is not so identified, it is considered to be child support. All support payments received by a taxpayer must be reported on Line 156, whether they are taxable or not. The taxable amount is then included in income on Line 128. Likewise, all support payments made must be reported on Line 230, whether they are deductible or not. The deductible portion is then entered on Line 220. All written agreement, court orders or their amendments should be registered with CRA by completing Form 1158 Registration of Family Support Payments and sent to CRA.

Taxable/Deductible Support Payments Support payments are taxable to the recipient and deductible by the payer if all of the following requirements are met: 1. The amounts are paid under the terms of a court order or written agreement. If

the payments are for child support, the agreement must have been made prior to May 1, 1997 and cannot have been altered or changed after that date.

2. The payments are for the maintenance or benefit of the former spouse or common-law partner, or the taxpayer’s children, or both. If the payments are for child support, the parties cannot have elected to have the revised rules apply.



3. The recipient and payer are living apart at the time the payments are made. 4. The payment is a fixed or pre-determined amount that is payable on a regular

periodic basis (for example, weekly, biweekly, or monthly). 5. The recipient can spend the money at his or her discretion and is not required to

account for its use. 6. The payment is made directly to the taxpayer’s former spouse or common-law

partner or parent of the taxpayer’s child. 7. All required non-taxable/non-deductible support payments have been made. Several of these conditions are described in more detail below.

Written Agreement The written agreement does not have to take any particular form, but must meet the following minimal conditions: It must be a written document under which a person agrees to make regular

payments to maintain his or her former spouse or common-law partner, or children, or both.

It must be dated and signed by both parties. If the payments are for child support, the agreement must meet the following additional requirements in order for the payments to be taxable/deductible: The agreement was made prior to May 1, 1997, and has not been altered or

changed after that date. The agreement does not state that the revised rules are to apply to child support

paid as of a certain date on or after May 1, 1997, and no election has been made to have the revised rules apply.

Prior Payments Payments made before the date of a court order or written agreement are taxable/deductible if they meet the above requirements and: the order or agreement specifically states that the prior payments are

considered to have been made under the agreement; and the amount was paid in the year the order or agreement was made or in the

immediately preceding year.



Illustration 10.1

Hal and Anne have no children. They separated in July, 2007, and Hal began paying Anne a spousal allowance of $1,000 per month. Their agreement, signed in March 2009, says that payments made prior to that date are considered to have been made under the agreement. Since the agreement states that prior payments fall under the terms of the agreement, Anne must report the payments made in 2008 and 2009, and Hal may deduct them. The 2007 payments, however, are neither taxable to Anne nor deductible by Hal, even though they are included in the agreement. This is because the payments were not made in the year of the agreement or in the immediately preceding year.

Fixed and Periodic Payments Support payments must ordinarily be a fixed amount that is payable periodically. This means that a lump-sum paid to obtain a release from further liability is not taxable/deductible. However, if a taxpayer gets behind in making monthly payments, and then pays a lump sum to satisfy arrears, the amount is considered to be an accumulation of periodic payments and is taxable/ deductible (because the amounts were payable on a periodic basis, even though they were not actually paid periodically).

Specific-Purpose and Third-Party Payments To qualify as taxable/deductible support payments, recipients must have discretion over how the payments are to be spent. As a result, amounts that are paid for a specific purpose, such as tuition, rent, medical insurance, etc. are not ordinarily taxable/deductible. Also, any amount paid as support must be paid directly to the former spouse or common-law partner or parent of the child in order to be deductible. Therefore amounts paid to third parties are not ordinarily taxable/ deductible (for example, rent payments for the former spouse or common-law partner that are paid directly to the landlord).Specific-purpose or third-party payments are taxable to the recipient and deductible by the payer if the order or agreement stipulates that the payments are allowed or if it allows the recipient the freedom to redirect the payment to his or her own use at any time.



Illustration 10.2

In their 1996 separation agreement, Daisy agreed to pay Ralph an allowance of $300 per month plus an additional $200 per month to her son’s activities. Ralph can spend the $300 allowance as he chooses. It is therefore taxable to Ralph and deductible to Daisy. If the agreement allows Ralph to redirect the $200 per month to his own use whenever he wishes, the $200 is also taxable/deductible as described above. If the agreement has been amended since May 1, 1997 the $200.00 would be considered child support and therefore neither taxable nor deductible.

Payments to Government Agencies Payments must ordinarily be made directly to the former spouse or common-law partner or parent of the child, however, payments made through provincial maintenance enforcement programs, in which payments are collected on behalf of recipients and then turned over to them for their use, generally maintain their taxable/deductible status. This is because the government simply acts as an agent for the recipients, who continue to have full use of and authority over the monies collected. However, payments made to social services often cease to qualify as deductible support payments. This is because, as a condition of receiving social assistance, the rights to such payments are commonly assigned to the province. Thus the former spouse or common-law partner or parent of the child no longer has any right to the money. The courts have ruled that, in such situations, the support payment is no longer taxable to the recipient or deductible by the payer.

Payments Made Directly to a Child Payments made directly to a child, instead of to former spouse or common-law partner or parent of the child, do not qualify for deduction by the payer, even if the agreement specifically states that the payment is for the benefit of the child. Payments must always be made to the former spouse or common-law partner, or parent of the taxpayer’s child, except for specific-purpose or third-party payments as outlined above.

Ordering of Deductible/Non-deductible Support Payments Taxpayers may sometimes be required to make both deductible support payments and non-deductible support payments. In such cases, all non-deductible support payments are deemed to have been made first. Only after all non-deductible support has been paid is the taxpayer allowed to claim any deductible support payments.



Illustration 10.3

Harry has to pay child support of $500 per month to Nancy under an agreement dated November 1, 1994. Harry and Nancy filed a joint election to have the revised rules apply beginning on July 1, 2009. During 2009, Harry paid Nancy $500 per month from January through August ($4,000). In late August he lost his job, and therefore paid her only $100 per month for September through December ($400). Harry cannot claim any deductible support payments until all required non-deductible support payments have been made. The non-deductible support payable for the year is $3,000 ($500 per month for July through December)). Therefore, of the $4,400 Harry paid, $3,000 is attributed to non-deductible support. The balance ($1,400) is attributed to deductible support. Therefore, Harry reports $4,400 on Line 230, but can deduct only $1,400 on Line 220. Likewise, Nancy reports $4,400 on Line 156, but includes only $1,400 in taxable income on Line 128.

A similar situation may arise if payments consist partly of non-deductible child support and partly of deductible spousal or common-law partner support, and the total payments made are less than that required by the order or agreement. In such cases, the payments are first attributed to child support (the non-deductible component), and only then to spousal or common-law partner support (the deductible component).


Support Payments and Personal Amounts A taxpayer who is required to make support payments for a spouse or common-law partner or children is not ordinarily allowed to claim any personal amounts in respect of the same spouse or common-law partner or children. However, in the year of separation or reconciliation only, there is an exception which allows taxpayers to claim personal amounts in respect of persons for whom they are required to make support payments (if they meet the necessary requirements), provided they do not deduct any related support payments. In years other than the year of separation or reconciliation, spouses or common-law partners who are required to make support payments may not claim personal amounts in respect of such persons, regardless of whether they deduct the related support payments or not. The one exception to the rule occurs when both parties are required to make support payments during the same year and as a result of applying the rule no one will be able to claim the personal amount. In this situation either party may claim the amount but not both. Note that the exception for the year of separation or reconciliation is dependent upon whether or not support payments are deducted. In many cases, this is not an issue since the support payments are not deductible in the first place. However, if the support payments are deductible (and therefore taxable to the recipient), the person receiving the payments must include them in income regardless of whether the payer claims a deduction for them.




Repayments of Support Taxpayers are sometimes required by a court order to repay support payments previously paid to them. If the support payment that is being repaid was originally included in the taxpayer’s income, the repayment can be deducted on Line 220, either in the year of repayment or in any of the next two years. Likewise, the taxpayer receiving the repayment must include it in income on Line 128 in the year it is received, if the amount being repaid was originally deducted on Line 220 of a current or a prior year’s return.

Legal Fees The following legal fees related to support payments are deductible on Line 232: legal fees incurred to establish support payments; legal fees incurred to obtain an order for support payments; legal fees incurred to obtain an increase in support payments; legal fees incurred to enforce payment of support payments; legal fees incurred to defend against the reduction of support payments; and legal fees incurred to obtain a divorce or draw up a separation agreement if the

divorce or separation agreement makes provision for support payments. The following legal fees are not deductible: legal fees incurred to obtain a divorce or draw up a separation agreement that

does not make provision for support payments; legal fees incurred to obtain custody or visitation rights; and legal fees incurred by the person required to make support payments.

2009 General Income Tax and Benefit Guide, page 28; CRA Guide P102 Support Payments.


Adoption Expenses Beginning in 2005, taxpayers who adopt a child may claim a personal amount in respect of eligible adoption expenses. The claim may be made in the tax year that includes the end of the adoption period and may include all eligible adoption expenses incurred in the adoption period, to a maximum of $10,909 per child (for 2009). Adoption expenses are claimed on Line 313 of Schedule 1.



Adoption Period The adoption period begins at the earlier of the time that the eligible child’s adoption file is opened with a provincial or

territorial ministry responsible for adoption (or with an adoption agency licensed by a provincial or territorial government) and

the time, if any, that an application related to the adoption is made to a Canadian court

The adoption period ends at the later of the time an adoption order is issued by, or recognized by, a government in

Canada in respect of that child, and the time that the child first begins to reside permanently with the individual.

Eligible Adoption Expenses Eligible adoption expenses include: fees paid to an adoption agency licensed by a provincial or territorial

government expenses related to the finalization of an adoption order in respect of that child; reasonable and necessary travel and living expenses of the child and the

adoptive parents; document translation fees; mandatory fees paid to a foreign institution; mandatory expenses paid in respect of the immigration of that child; and any other reasonable expenses required by a provincial or territorial government

or an adoption agency. The claim may be split between two adoptive parents, but the total claim may not exceed the $10,909 limit per child.

Illustration 10.4

Nick and Helen were unable to have their own children so in 2007; they started the process of adopting a child from Bosnia. The adoption was finalized in 2009. Their eligible adoption expenses by year were:

2007: $2,547 2008: $5,479 2009: $9,472

When filing their 2009 income tax return, Nick claims $10,909 for adoption expenses. The claim is the lesser of the total eligible adoption expenses ($17,498) and the $10,909 limit.




Child Care Expenses Many parents pay others to care for their children, either on a regular or occasional basis. In many cases, the cost of such care is a non-deductible personal expense. In certain situations, however, payments made for child care may be deducted on Line 214. This section of the chapter explains the rules used to determine whether child care expenses are deductible and, if so, the amount of the deduction.

Purpose of Child Care In order to be deductible, child care expenses must have been incurred to allow a taxpayer or another supporting person to: work, either as an employee, self-employed person, or active partner in a

business; conduct research or similar work for which a grant was received; or attend school (including high school) to take a program that lasts at least three

consecutive weeks and requires the student to spend at least 10 hours per week, or 12 hours per month, on course work.

Eligible Child Child care expenses are deductible only when incurred on behalf of an “eligible child.” An eligible child is a child of the taxpayer or of the taxpayer’s spouse or common-law partner, or any other child dependent on the taxpayer so long as income for the year does not exceed the basic personal amount ($10,320 for 2009). The child must also be under sixteen years of age at some time during the year or mentally or physically infirm. The child also has to have resided with the taxpayer at the time the expenses were incurred.

Eligible Payments Eligible child care expenses include the cost of baby-sitting; nursery schools; day-care centres; day camps or day sports schools; and boarding schools and overnight sports schools and camps. Unless otherwise specified, eligible payments must be for child care only. Thus payments for medical care, clothing, transportation, education, board or lodging are not eligible for deduction as child care expenses.



If a fee for child care services includes an amount for such non-qualifying services, it should be identified on the receipt and not included in the claim. However, there are some exceptions to this general rule, as outlined below: The cost of a meal may be deducted if it is included in the cost of baby-sitting,

day nursery or day camp services. Kindergarten fees may be deducted if the school issues a receipt showing that

the fees were paid for child care rather than education. Payments made to a boarding school, or overnight sports school or camp are

allowed, even though they include a board and lodging component. However, in this case the deductible amount is limited to the maximum of: ▪ $250 per week for each eligible child who is disabled; ▪ $175 per week for each eligible child under seven; and ▪ $100 per week for each other eligible child.

Timing of Payments Expenses are deductible only for the year in which they are incurred. This may not be the same year in which they are paid. For example, expenses incurred for December, 2008, may not be paid until January, 2009. They are deductible on the 2008 return, however, not on the 2009 return.

Recipient of Payment Expenses paid to any resident of Canada may be deducted except those paid to: the father, mother, or supporting person of an eligible child; a child, brother, or sister of the taxpayer or of the taxpayer’s spouse or common-

law partner, if the person is under eighteen; or a person for whom the taxpayer or another supporting person is claiming a

personal amount. Since child care expenses cannot be deducted if they have been paid to someone for whom a taxpayer is claiming a personal amount, on occasion a taxpayer may have to choose between the child care deduction and claiming the personal amount.

Illustration 10.5

Ashley and her husband, Terry, have a son, age eight. Ashley’s mother, Sandra, also lives with them. Last year, Ashley and Terry paid Sandra $2,000 to look after their son after school while they were at work. Sandra is infirm and has no other income. Ashley and Terry are eligible to claim the caregiver amount for Sandra. However, if they do so, they may not claim the child care expenses that they paid her. They must choose which claim they wish to make.




Eligible Claimants Not all taxpayers are eligible to deduct child care expenses. In cases where there is more than one supporting person, the expenses must usually be claimed by the one with the lower net income.

Supporting Person A supporting person for purposes of the child care deduction is defined with respect to the taxpayer, not the dependant. There is a supporting person other than the taxpayer if there is another person who resided with the taxpayer at any time during the year and at any time within the first sixty days of the year following who is also: a parent of the child; or the taxpayer’s spouse or common-law partner; or an individual who claimed a personal amount for the child If the taxpayer is the only supporting person, he or she may deduct all eligible child care expenses incurred, subject to the usual deduction limits. If there is another supporting person, the one with the lower net income (including zero income) is usually the only one who is eligible to deduct the expenses, even if the other supporting person paid them.

Illustration 10.6

John and Linda lived common-law for years, but separated permanently in March. They have joint custody of their two year-old daughter, Amy. Since they both work, they each incur child care expenses whenever Amy comes to live with them. In November, John got married, but Linda is still single. Linda may deduct all the child care expenses she paid for Amy while she was at work (subject to the usual limitations) because she is the only supporting person. This is because, although she lived with John (who is a parent of the child) for part of the year, she did not also live with him at any time in the first sixty days of the following year. When we consider the child care expenses that John can deduct, we find that he is in a different situation. He is not the only supporting person: his new wife, Sue, is a supporting person because she is John’s spouse or common-law partner and she lived with him for part of the year and during the immediately following sixty days. As a result, John can deduct the child care expenses he paid for Amy only if his net income is lower than Sue’s. If Sue’s net income is lower, she is the only one who can deduct the child care expenses, even if they were paid by John.

In the unlikely situation that the net incomes of two supporting persons are equal, they must decide which of them will claim the deduction: it cannot be split.



Exceptions There are exceptions to the rule prohibiting the supporting person with the higher net income from deducting child care expenses. Specifically, the higher-income person may claim child care expenses if the lower-income person is attending school, incapable of caring for the children because of a physical or mental infirmity, confined to prison, or separated from the higher-income person. These exceptions are explained in more detail in a later section entitled “Part C – Are you the person with the higher net income?”

Form T778 Child care expenses are calculated on Form T778 Child Care Expenses Deduction (shown in Illustrations 10.7 and 10.8) and then transferred to Line 214 of the taxpayer’s T1. If a higher-income supporting person is entitled to claim child care expenses, the T778 for that person should be completed first.

Part A – Total child care expenses Part A of Form T778 asks for the following information: The name and date of birth of each eligible child. It is important to list all

eligible children, even those for whom no child care expenses were incurred. This increases the per-child limit for child care expenses (discussed below). Remember that eligible children are those who are either under sixteen at some time during the year, or who are mentally or physically infirm. For children to be eligible, it is not necessary that they be under sixteen at the time the expenses were incurred, but only at some time during the year. For older children to be eligible, they must be mentally or physically infirm; it is not necessary that they be disabled.

The payment details. For each child for whom child care payments were made, indicate the amount of the expense. Be sure to include all expenses paid by either the taxpayer or the other supporting person. Then enter the name of the person or organization to whom child care was paid. If the payment was to an individual, that person’s SIN must also be provided. If child care is paid to a boarding school or camp, the number of weeks must also be indicated.

The amount of child care paid for a child 18 or older. Since the Income Tax Act does not specify any age at which a person ceases to be a child (review the definition of a child in Chapter 4), the child care deduction may be claimed for someone over the age of 18 who needs care because of a mental or physical infirmity. If a taxpayer is claiming child care expenses for an infirm child eighteen or older, Field 6795 should be completed.



Part B – Basic limit for child care expenses deduction There is a limit to the basic amount that any taxpayer can deduct for child care. This limit is the least of: $7,000 for each eligible child who is under 7, plus $10,000 for each eligible child

who qualifies for the disability amount, plus $4,000 for each eligible child who is either age 7 to 16 or is mentally or physically infirm;

the total amount actually paid for child care in the year; and two-thirds of the taxpayer’s earned income for the year. Earned income, for purposes of the child care expense deduction, includes: salaries, wages, and other remuneration (such as tips and gratuities), as well as

any taxable benefits, received by the taxpayer from an office or employment; the portion of training allowances, scholarships and similar awards, and

research grants that are included in income; supplementary earnings received under projects sponsored by the Government

of Canada to encourage employment or sponsored under Part II of the Employment Insurance Act or similar program;

apprenticeship incentive grants received under the AIG and ACG programs; net income from a business or active partnership, excluding losses; and CPP/QPP disability benefits. Note that earned income does not include regular employment insurance benefits therefore, if a taxpayer’s income is solely from EI, the basic limit for the child care claim under Part B is reduced to zero. However, this does not preclude a claim under Part D. The least of the three limitations is entered at Line 7 of Part B. Higher-income supporting persons then go directly to Part C, leaving Lines 8 and 9 blank. Lower-income supporting persons use Line 8 to deduct any amount claimed by a higher-income person (which is why the claim for the higher-income person should be completed first). They can then claim the balance on Line 214, unless they are claiming an additional amount under Part D.

Part C – Are you the person with the higher net income? A supporting person with the higher net income (before deducting child care expenses) is eligible to claim child care expenses only if, during the year, the lower-income person was: a. attending school part-time (i.e., was enrolled in a program lasting at least three

consecutive weeks and requiring course work of at least 12 hours per month); b. attending school full-time (i.e., was enrolled in a program lasting at least three

consecutive weeks and requiring course work of at least 10 hours per week;



c. incapable of caring for children because of mental or physical infirmity and was confined to a bed, wheelchair, hospital or asylum for a period of at least two weeks;

d. incapable of caring for children during the year because of mental or physical infirmity and is likely to remain incapable of caring for them for an indefinite period;

e. in prison or a similar institution for at least two weeks; or f. separated from the taxpayer because of a breakdown in the relationship for a

period of at least 90 days including December 31 and who reconciled within the first 60 days of the following year.

To claim child care expenses in these situations, a check mark must be entered in the box next to the one that applies. Also, the name, SIN, and net income of the lower- income supporting person must be provided at the top of Part C. The deduction limit for the higher-income supporting person is based on the number of weeks or months during which any of the above situations apply. The limit is calculated as 2.5% of the basic limit (from Line 4 of Part B) multiplied by the number of months during which condition (a) is met, plus the number of weeks during which conditions (b) to (f) are met, making sure not to count any time twice. The taxpayer can claim the lesser of the above limit (shown on Line 13) or the limit calculated in Part B (from Line 7). This amount is entered at Line 14, and carried to Line 214 of the tax return, unless the taxpayer is claiming an additional deduction under Part D.



Illustration 10.7



Illustration 10.8



Illustration 10.9

Tony and Maria have a three-year-old daughter, Anna. Tony worked full-time and earned $40,000, while Maria (who had no income) attended university full-time for 20 weeks. Anna stayed at a day-care centre so that Tony could work while Maria was attending university. The day-care expenses were $5,000. Since Tony is the higher-income spouse or common-law partner, his claim is limited to $3,500, calculated as 2.5% of the basic limit multiplied by 20 ($7,000 x 2.5% x 20).

Part D – Are you enrolled in an educational program in 2009? In recognition of the importance of education, the federal government provides extra assistance to parents enrolled in specified educational programs by allowing them to deduct child care expenses incurred while attending school. The deduction is subject to the following rules: The claim is available to single parents attending school, or to couples if both are

attending school at the same time. The claim is limited to 2/3 of net income, not 2/3 of earned income. This

recognizes the fact that students may have little, if any, earned income, which would ordinarily reduce their potential child care claim to zero.

The claim is available to those attending secondary schools, as well as those attending colleges, universities or other designated institutions.

The claim is available to those enrolled in both full-time and part-time programs, (i.e., programs that last at least 3 consecutive weeks and require students to spend at least 10 hours a week, or 12 hours per month, respectively, on courses or work in the program).

The child care expense deduction under these circumstances is limited to the least of the following: Line 18: 2.5% of the basic limit, multiplied by the number of months in part-time

attendance plus the number of weeks in full-time attendance at school; Line 19: the per-child limit (from Line 4) less any child care expenses already

claimed (on either Line 9 or Line 14, whichever applies); Line 20: the total child care expenses incurred (from Line 5) less any child care

expenses already claimed (on either Line 9 or Line 14, whichever applies);

Line 21: 2/3 of net income (not earned income); and Line 22: Line 13 minus Line 6 (this only applies to those who completed Part C).



Those who completed Part C should enter the least of the above five amounts on Line 23; those who did not complete Part C should enter the least of the first four amounts (Lines 18 through 21), on Line 23. To this is added the allowable deduction (if any) calculated under Part B or Part C. The total of the two is the amount to deduct on Line 214.

Child Care and the Canada Child Tax Benefit Upon the introduction of the Universal Child Care Benefit in 2006, the Canada Child Tax Benefit supplement or each child under seven was eliminated. For years prior to 2006, the supplement was reduced by 25% of the total child care expenses claimed for all children under the age of eighteen.

Child Care and the Disability Supplement As discussed in Chapter 8, the disability supplement is reduced by the amount by which total child care expenses and attendant care expenses claimed by anyone in respect of the child exceeds $2,399.

Illustration 10.10

Martin was 15 years old on December 31, 2008. He is confined to a wheelchair and has been certified by a physician as being eligible for the disability amount. Eligible child care expenses for Martin in 2008 were $4,000, and were claimed on Line 214 of his father’s tax return. The $4,095 supplement to the disability amount claimed in respect of Martin is therefore reduced, and is calculated as follows: $4,095 minus ($4,000 - $2,399) = $2,494

Child Care Receipts Taxpayers must have receipts to support their claim for child care expenses. The receipts must be issued by the person or organization to whom the child care payments were made and, if payment was made to an individual, must contain that person’s SIN. Receipts need not be submitted with the return, but must be kept in case the CRA asks to see them.

Child Care Expenses and Children’s Fitness Amount It is possible that a given expense may satisfy both the conditions for an eligible child care expense and a children’s fitness amount (discussed in Chapter 4). In this case the amount must first be claimed as a childcare expense and any unused amount may be claimed for the children’s fitness amount.




Child Care and Marital Status Change

Year of Marriage or Establishment of Common-law Relationship In the year of marriage or establishment of a common-law relationship, each spouse or common-law partner becomes a supporting person of the other. Therefore, child care expenses paid by both spouses or common-law partners, whether prior to or after the date of marriage or establishment of the relationship, should be combined and claimed by the spouse or common-law partner with the lower net income for the whole year.

Illustration 10.11

Grant and Kate got married in October. They each have a child from a previous relationship, and they each incurred child care expenses for their respective children, both before and after they got married. Grant’s net income is $42,000 and Kate’s is $40,000. Because Kate has the lower net income, she is the only one who can claim the child care expenses incurred during the year for both children.

Separation in the Year In the year of separation, former spouses or common-law partners are not supporting persons if they were living separate and apart on December 31, and for at least the first 60 days of the following year.

Illustration 10.12

Phil and Faith are married and have a six-year-old child. Faith has the higher net income; during the year, she incurred $3,500 in child care expenses. In September, Phil and Faith separated. If Phil and Faith remain separated through December 31 and for the first sixty days of the following year, Phil will not be a supporting person. Faith will therefore be eligible to claim all the child care expenses she incurred.

If a separation occurs during the year, and the taxpayers are living separate and apart on December 31 but reconcile during the first 60 days of the following year, both parties are considered supporting persons. If the separation has lasted at least 90 days, the higher-income person can then claim child care expenses based on the number of weeks of separation.



Illustration 10.13

If Phil and Faith (from the previous example) reconcile during the first sixty days of the following year, Phil will be a supporting person. In this case, since the separation lasted 90 days, Faith will be able to claim child care expenses based on the number of weeks of separation during the year. For example, if the separation was 16 weeks, Faith could claim $2,800 ($7,000 x 2.5% x 16 weeks). Since Phil is the supporting person with the lower net income, only he may make a claim for the remainder of the expenses.

Putting the Rules into Practice Study Illustrations 10.14 and 10.15 below. They demonstrate the application of the child care expense rules in two hypothetical situations.

Illustration 10.14

Mike and Donna Weir are married and are the parents of three children: Genevieve (born May 31, 1997); Rosaleen (born December 5, 1998); and Marguerite (born March 6, 2005). Child care expenses of $8,500 were incurred for Marguerite only. The expenses were paid to ABC Daycare. Donna is the lower net income supporting person. Her earned income for child care expense purposes was $39,000. Donna’s completed T778 is reproduced in Illustrations 10.7 and 10.8. Note that by listing all of the children in Part A of the form, including those children for whom no child care expenses were incurred, the amount of the deduction that Donna may claim is increased considerably. The maximum that she could claim if only Marguerite were listed would be limited to $7,000 instead of $8,500.



Illustration 10.15

Dave and Jane have two children (twins, aged nine years). Jane was confined to a hospital for a period of six weeks during the year. Dave’s earned income was $44,400 and Jane’s earned income was $8,700. Their total payments for child care amounted to $3,550. Jane is the lower income supporting person. Their claims for child care expenses are calculated as follows: Dave: First limitation: $4,000 per child $8,000 Second limitation: total payments 3,550 Third limitation: 2/3 of earned income (2/3 x $44,400) 29,600 Part C limitation: $8,000 x 2.5% x 6 weeks $1,200 Dave’s allowable deduction is $1,200. Jane: First limitation: $4,000 per child $8,000 Second limitation: total payments 3,550 Third limitation: 2/3 of earned income (2/3 x $8,700) 5,800 Jane’s allowable deduction is $2,350, calculated as follows: Least of the above three limitations $3,550 Less: amount deducted by a supporting person $2,350

1,200

Note that Dave’s claim should be calculated first. Both Dave and Jane must complete Form T778 to make their claim.



Personal Amounts In this section we discuss the effect of marriage, establishment of a common-law relationship, and separation on various personal amounts.

Spouse or Common-law Partner Amount

Year of Marriage or Establishment of Common-law Relationship For the year in which a taxpayer marries or establishes a common-law relationship, the spouse or common-law partner amount that can be claimed is calculated using the spouse’s or common-law partner’s net income for the entire year. Remember, from Chapter 7, that any social assistance received by a spouse or common-law partner during a period in which the couple lived together must be reported by the spouse or common-law partner with the higher net income for the year, if they are considered to be spouses or common-law partners as of December 31. Otherwise the recipient reports it.



This means that when a couple marries or establishes a common-law relationship during the year, social assistance payments made prior to that date are included in the income of the recipient; those received after (if any) must be included in the income of the spouse or partner with the higher income.

Illustration 10.16

Ken and Jolene married on June 10. Jolene received $8,600 of social assistance payments prior to the marriage. This was her only income for the year. Ken had $42,000 of employment income. Ken can claim a $1,720 ($10,320 – $8,600) spouse or common-law partner amount for Jolene because her net income is $8,600. Had Ken and Jolene been married and living together throughout the year, however, the social assistance would be included in Ken’s income. Then Ken could claim the full spouse or common-law partner amount because Jolene’s income would be zero.

Year of Separation In the year of separation, a claim for the spouse or common-law partner amount is calculated using the spouse or common-law partner’s net income prior to the date of separation, rather than for the entire year, provided the separation includes December 31. For example, if a taxpayer separated on March 1 and the spouse’s or common-law partner’s net income for January and February was $2,000, the allowable spousal or common-law partner amount would be $10,320 – $2,000 = $8,320. Social assistance received by either spouse or common-law partner during a period in which they lived together must be reported by the spouse or common-law partner with the higher net income for the year. This means that any social assistance received after the date of separation must be reported by the recipient.

Illustration 10.17

Kevin and Molly are married and have three children. They separated permanently on June 30, after which Kevin received $800 per month in social assistance for himself and the children ($4,800 for the year). Kevin must report all the social assistance he received, even though Molly had the higher net income for the year. This is because they were not living together at the time Kevin received the payments.

In the year of separation, taxpayers who claim a spouse or common-law partner amount may not deduct support payments. They may claim one or the other, but not both.



Illustration 10.18

Fred separated from Mary on October 1, and began paying her $300 per month in spousal support on that date. Mary’s net income before the separation was $2,500. Fred’s taxable income before deducting the spousal support is $48,000. Therefore, Fred is in the 22% federal tax bracket. His allowable spouse or common-law partner amount is $10,320 – $2,500 = $7,820. His allowable deduction for the year for the support payments is $900 (three months at $300 a month). Fred should claim the spouse or common-law partner amount since this results in a federal tax saving of $1,173 (15% x $7,820). Claiming the support payments would result in a federal tax saving of only $198 (22% x $900).


Amount for an Eligible Dependant

Year of Marriage or Establishment of Common-law Relationship In the year a taxpayer marries or establishes a common-law relationship, a claim for the eligible dependant amount may be permitted if one spouse or common-law partner supported a dependant prior to the date of marriage. This is because the conditions for claiming this amount need only be met at some time in the year.

Illustration 10.19

Harrison is a widower with two small children. He has a net income of $30,000. In August, Harrison married Mavis, who has a net income of $12,000. Harrison can’t claim a spouse or common-law partner amount for Mavis because her income is too high, but he can claim an eligible dependant amount for one of his children, since he was unmarried for part of the year and the children lived with him during that time.

Rarely, both an eligible dependant amount and a spouse or common-law partner amount can be claimed by different taxpayers in respect of the same dependant. This dual claim is allowed only if the dependant was not married or living common-law throughout the entire year (e.g., in the year of change in marital status).

Illustration 10.20

Jenny is under eighteen and she has no income. She lived at home with her widowed father until September when she married Andrew. Jenny’s father is entitled to claim the eligible dependant amount for her and Andrew is eligible to claim the spouse or common-law partner amount for her. Both claims are allowed since Jenny was married for only part of the year.



However, in no case can a taxpayer claim both an eligible dependant amount and a spouse or common-law partner amount in respect of different dependants.

Illustration 10.21

George and Martha married during the year. George has sole custody of one child from his previous marriage. George’s income is $48,000 and Martha’s is $2,000. George is entitled to claim the eligible dependant amount for his child, but can only do so if he does not claim the spouse or common-law partner amount for Martha.

Year of Separation To claim the eligible dependant amount, a taxpayer need only meet the qualifications at some time in the year. Therefore a short and informal period of separation may sometimes allow a legitimate claim to be made. Taxpayers who separate, then reconcile before the end of the year may be able to claim the eligible dependant amount for the period during which they were separated.

Illustration 10.22

Fred and Angie are married and have two children. They separated on February 1 and reconciled on November 15. Angie had custody of the children and supported herself and the children during the period of separation. Because Angie was separated during part of the year, she may be able to claim an eligible dependant amount for one of the children.

However, for a taxpayer to be able to claim an eligible dependant amount, he or she may not support, nor be supported by, the estranged spouse or common-law partner during the period of separation. This means that if one spouse or common-law partner continues to support the other (as sometimes happens in the case of a temporary separation) neither may claim an eligible dependant amount. However, support payments required under the terms of a written agreement or court order do not constitute support in this context.

Illustration 10.23

If, in Illustration 10.22, Fred had supported Angie during the separation by paying the mortgage and household bills, or sending her money to buy food or other necessities, Angie would not be eligible to claim the eligible dependant amount.

Although, in the year of separation, taxpayers may choose between claiming deductible support payments and claiming personal amounts, this choice is not available in later years (except in a year of reconciliation). This means that in any year in which the spouses or common-law partners are separated for the entire year, taxpayers are not allowed to claim an eligible dependant amount for dependants if they are required to make support payments for them. This ensures that the recipient of child support, not the payer, continues to be entitled to claim the amount.



Illustration 10.24

Jimmy and Alice have been divorced for several years. Their son, Roger, lived with Alice until July, when he moved in with his father. Under the terms of their separation agreement, Jimmy paid Alice child support payments each month until Roger moved in with him. Jimmy may not claim the eligible dependant amount for Roger, because anyone required to make support payments for a dependant is prohibited from claiming a personal amount for that dependant, except in the year of separation or reconciliation, which is not applicable in this case. Effective for 2007, this rule will not apply, if solely as the result of it’s application no one can claim the amount for Roger. Next year, Jimmy may be able to claim the amount for an eligible dependant amount for Roger if he is no longer required to pay child support.

Note that the date of marital status change, if applicable, must be shown on Schedule 5 by any taxpayer claiming the eligible dependant amount.

Amount for Children Under 18 If the child does not live with both parents throughout the year, only the parent who is eligible to claim the amount for an eligible dependant in respect of that child may claim the child amount for the child. Where only one parent is eligible to claim the amount for an eligible dependant for a child but cannot do so because of the child’s income or because they are claiming the amount for an eligible dependant for another child, they may still claim the child amount for that child. CRA’s position is that, in the case of shared custody throughout the year, the parents must decide who will make the claim or no claim will be allowed.

Illustration 10.25

In Illustration 10.19, Harrison may claim the child amount for both of his children. In Illustration 10.20, Jenny’s father may claim the child amount for Jenny. In Illustration 10.21, George can claim the child amount for his child whether he claims the amount for an eligible dependant or not. In Illustration 10.22, Angie can claim the child amount for both of the children. If she does not need the amount, it can be transferred to Fred using Schedule 2. In Illustration 10.23, either Angie or Fred may claim the child amount for both of the children. In Illustration 10.24, the parent, either Jimmy or Alice, who claims the amount for an eligible dependant must claim the child amount otherwise only one parent may claim it, not both.



Caregiver Amount and Amount for Infirm Dependants 18 or Over Although the caregiver amount and the claim for infirm dependants can usually be split between supporting persons, this is not the case if someone has claimed an eligible dependant amount for the dependant. In this case, only the person claiming the amount for an eligible dependant can claim either of these amounts.

Amounts Transferred from Your Spouse or Common-law Partner (Schedule 2) Taxpayers cannot claim spousal transfers if they were separated for a period of 90 days or more that began in the taxation year and included December 31.


GST/HST Credit In the year of marriage or establishment of a common-law relationship, the incomes of both spouses or common-law partners for the entire year must be included in the GST/HST credit income calculation. One spouse or common-law partner must apply for the credit on behalf of both of them, and their dependants, if applicable. No claim for the eligible dependant GST/HST credit is possible, even if one (or both) of the spouse or common-law partners claimed the eligible dependant amount for someone. This is because this credit is available only to those who were not married or living common-law at the end of the year. In the year of separation, the former spouse or common-law partners each apply for their own GST/HST credit, taking only their own incomes into account (assuming the separation has lasted 90 days and includes December 31).

Changes after Application In most cases eligibility for the GST/HST credit is determined by the applicant’s financial and family situation at the end of the taxation year. However the CRA recalculates a taxpayer’s GST/HST credit as soon as they are informed of changes to the family situation (e.g., marriage). Taxpayers must inform the CRA when any of the following situations occur: they move; their marital status changes*; they have a child; a child for whom they were receiving the credit is no longer in their care, stops

living with them, becomes a spouse or common-law partner or a parent, or dies; they become a resident of Canada; or they or their spouse or common-law partner are no longer resident in Canada. *use Form RC65 Marital Status Change to notify CRA of marital status changes.



Illustration 10.26

When Grace filed her return, she applied for a GST/HST credit for her common-law partner, Gilbert, and for their child. In July of 2009, however, Gilbert left Grace. Because Grace informed the CRA of the change in marital status, her next quarterly GST payments will be adjusted accordingly.


Canada Child Tax Benefit If a couple separates during the year, and the separation lasts at least 90 days, the recipient of the Canada Child Tax Benefit may elect to have the estranged spouse’s or common-law partner’s income excluded from the calculation for all of the remaining months to which the base taxation year relates. The individual must make the election before the end of the eleventh month following the month of the separation. Use Form RC65 Marital Status Change to inform CRA of marital status changes.

Illustration 10.27

Monica separated from her husband, Warren, in March. She kept custody of her two children. Warren had such a high income that Monica had not previously been able to receive the Canada Child Tax Benefit. Now she may elect to have his income excluded from the calculation of her monthly entitlement and so receive benefits for April through June. Monica has until February of the following year to make her election.

Complete Q19.

Universal Child Care Benefit The Universal Child Care Benefit (UCCB) is paid to parents of children under the age of six years. If the family is eligible for the Canadian Child Tax Benefit (CCTB), the UCCB is paid to the parent who receives the CCTB. The family net income has no effect on the UCCB so it will be paid even if the family net income is too high to qualify for the CCTB. As with the GST/HST Credit and the CCTB, taxpayers should inform the CRA whenever there is a change in address or in the number of children under age six who are in the taxpayer’s custody. When the recipient of the UCCB has a spouse of common-law partner at the end of the taxation year, the UCCB must be reported by the spouse with the lower net income.



When the taxpayer’s spouse or common-law partner is reporting the UCCB, enter the amount of UCCB included in the spouse of common-law partner’s net income in the “Information about your spouse or common-law partner” section of the heading of the taxpayer’s return. If both spouses or common-law partners receive the UCCB during the year, the lower income taxpayer must report the total UCCB received during the year by both spouses or common-law partners. If the taxpayer’s marital status for tax purposes is not “married” or “living common-law” then they must report the UCCB that they received on their own tax return regardless of their marital status at the time the UCCB payments were received. If the taxpayer or the taxpayer’s spouse or common-law partner made a UCCB repayment that was included in the spouse’s or common-law partner’s income in the previous year, the person that reported the UCCB income in the previous year may deduct the amount on line 213. The UCCB repayment amount that can be deducted is shown in box 12 of the RC62 slip.

Summary In this chapter, you learned about support payments, child care expenses, and how to claim various personal amounts in a year of marital status change.


Child support is not taxable to the recipient nor deductible by the payer unless it is paid under an agreement made prior to May 1, 1997, that has not since been altered.

Spousal or common-law partner support is deductible if it meets certain specified conditions.

Deductible support payments may not be claimed until all non-deductible payments have been made.

Taxpayers may not claim personal amounts for dependants for whom they are required to make support payments.

Taxpayers who adopt a child may claim their adoption expenses (to a maximum of $10,909 for 2009) in the year that the adoption is finalized.

Child care incurred in order to work, conduct research or work for which a grant was received, or attend school may be deductible.

Child care expenses may normally be deducted only by the lower-income supporting person. The higher-income supporting person may claim child care expenses only under specified conditions.

The limit for the child care expense claim depends upon the age of the child and whether or not the child is disabled.



In the year of separation, the claim for the spouse or common-law partner amount is calculated using the partner’s income prior to the date of separation, rather than for the whole year, provided the separation lasts through December 31.

The GST/HST credit, Canada Child Tax Benefit and Universal Child Care Benefit may be adjusted if changes occur after the date of application. The taxpayer must notify the CRA of the change.



Chapter 11 – Students

Introduction This chapter covers topics of particular interest to students and to those who provide support to students (e.g., parents, spouses or common-law partners).


Report scholarships, fellowships, bursaries, and achievement prizes; Explain registered education savings plans and the Canada Education Savings

Grant; Claim eligible tuition fees and the education amount for a student on Schedule

11 and transfer the required amount to the tax return; Determine the unused tuition fees and education amounts that may be carried

forward or transferred to a supporting parent, grandparent, or spouse or common-law partner and make the appropriate entries on Schedule 11; and

Claim the deductions for adult basic education assistance and eligible moving expenses.

Glossary Before you read this chapter, review the following terms in the glossary: Registered education savings plan; Canada Education Savings Grant (CESG); and Canada Learning Bond (CLB).



Income Students may have income from a variety of sources, including employment, investments, etc. However there are several kinds of income which are specific to students. These are reported on Line 130 of the tax return and are discussed below.

Scholarships, Fellowships, Bursaries, and Achievement Prizes The CRA defines scholarships and bursaries as “amounts paid or benefits given to students to enable them to pursue their education” without requiring the recipients to do any work in exchange for them. Fellowships are said to be similar, “in that they are amounts paid or benefits given to persons to enable them to advance their education.” An achievement prize is defined as an “award to a particular person selected from a group of potential recipients and given for something that is accomplished, attained or carried out successfully.” The gross amount received by a taxpayer in a year as a scholarship, fellowship, bursary, or a taxable achievement prize is reported in Box 28 of a T4A slip and identified with a footnote and the number “05” in the footnote codes box. Amounts received for scholarships, fellowships, bursaries, taxable achievement prizes, and study grants (but not artist’s project grants) is completely exempt from tax if a student is enrolled in a program for which he or she can claim the education amount (discussed later in this chapter). If a student is not eligible for the education amount only the first $500 is exempt. The amount to report on Line 130 is the net amount, which is nil (if eligible for the education amount) or the gross amount minus $500 (in all other cases). Secondary and elementary school scholarships, which do not qualify for the education amount, are also exempt from tax, beginning in 2007 The T4A slip(s) should be attached to the return even if there is no net amount to report.

Illustration 11.1

Mark is a full-time student who qualifies for the education amount. He has two T4A slips for scholarships, one for $2,800 and the other for $300. Because Mark is eligible to claim the education amount, both these scholarships are exempt.

Illustration 11.2

Rodney has one T4A showing he received a $2,000 scholarship while attending a post-secondary institution. He is not eligible to claim the education amount. Rodney should attach his T4A to the return. The amount to include on Line 130 is $1,500, calculated as: Amount of scholarship from T4A $2,000 Less exemption Net amount to enter on Line 130 $1,500

500

250 Chapter 11 – Students


Be careful to distinguish between fellowships which are eligible for the exemption (either full or $500), and research grants (discussed in Chapter 2) which are not. If the primary purpose of the fellowship award is to further the personal education and training of the recipient, the award is treated the same way as a scholarship. However, if the primary purpose of the fellowship award is the conduct of research itself in some academic discipline, the award should be treated as a research grant, which means the full/$500 exemption does not apply. Prizes and awards received as a benefit from employment or in connection with a business are not eligible for the full/$500 exemption. If a taxpayer receives an artist’s project grant, he or she may deduct either $500 or related expenses, but not both.


Training Allowances Training allowances are amounts paid under various government programs to taxpayers taking training courses. While some types of training allowances are included in income, other types are not. Payments made under the Employment Insurance Act, or under provincial programs that operate under the terms of an agreement with the Canada Employment Insurance Commission are generally taxable. However, other programs may be treated in the same fashion as social assistance, with the amounts received being included in income and an offsetting deduction being claimed. Some payments that do not fall into either of the categories as described in the preceding section may be classified as bursaries and qualify for the full/$500 exemption. In general the government agency paying the amount will determine which tax treatment should be applied to the payment, and issue the appropriate slip.

Registered Education Savings Plan Payments The CRA describes a registered education savings plan (RESP) as a “contract between an individual who is the subscriber, and a person, or organization, who is the promoter. Under the terms of the contract, the subscriber makes payments to the promoter. In return, the promoter generally agrees to manage and invest the amounts that are paid plus the accumulated income so that the promoter can make educational assistance payments. Educational assistance payments are payments that further an RESP beneficiary’s post-secondary education.” Typically, a person would subscribe to such a plan to fund the education of a child or grandchild. RESP contributions, unlike RRSP contributions, are not deductible. However, the investment income earned by the plan is allowed to accumulate tax-free within the plan. The tax benefit of such an arrangement is that subscribers are not taxed on the income earned by the contributions they make. Rather, the investment income is taxed in the hands of the beneficiaries when they receive it.



Since beneficiaries are attending school when they receive the money, they generally have low incomes, resulting in little or no tax. In 1998, RESPs were made more attractive with the introduction of the matching 20% government contribution under the new Canada Education Savings Grant (CESG) program, which is discussed below. There is no annual contribution limit but lifetime contributions may not exceed $50,000 per beneficiary. For 2007 and prior years contributions must cease after the 21st year following the year in which the plan was established (extended to 25 years if the beneficiary is eligible for the disability amount in the 21st year). The plan must be terminated within twenty-five years of being established. Effective for 2008, the age limits have all been increased by 10 years. An RESP will make payments called Educational Assistance Payments(EAP)to a beneficiary that is a full-time student enrolled in a qualifying educational program at a post-secondary institution, or a part-time student that is enrolled in a specified educational program. As of June 18, 2008, a beneficiary is entitled to receive EAPs for up to six months after ceasing enrolment, if the payments would have qualified as EAPs had the payments been made immediately before the student’s enrolment ceased. Payments from an RESP are partly a refund of the original contributions and partly income earned by the contributions. The refund portion is not taxable, but the earnings portion is. The promoter determines the portions and reports the taxable amount in Box 42 of a T4A slip. The recipient includes this amount on Line 130. If a beneficiary decides not to pursue a post-secondary education, both the contributions and the income may be returned to the subscriber. The contributions are returned tax-free, but regular tax is payable on the income. In addition, a special 20% tax is levied unless the subscriber has sufficient deduction room to transfer it to his or her RRSP.

Canada Education Savings Grant The Canada Education Savings Grant program provides a matching government grant equal to 20% of annual RESP contributions on behalf of beneficiaries under the age of 18 who are resident in Canada. The basic annual grant limitation was $400 per year for 1998 through 2006 and increased to $500 per year in 2007. Therefore for 2009 the maximum grant is $500 per beneficiary per year, which corresponds to an RESP contribution of $2,500. However, if the full grant is not received in a given year, the unused CESG contribution room carries forward, and can be used in a subsequent year, to a maximum $1,000 per year. CESG room begins to accumulate at birth or as of January 1, 1998, whichever is later and there is a lifetime limit of $7,200. If funds are withdrawn from an RESP for non-educational purposes, the CESG portion must be repaid to the government.



Beginning in 2004 the grant rate was increased on the first $500 of contributions made to an RESP by low-income families for a beneficiary who is a child under 18 years of age. The enhanced rates are as follows: For families with qualifying net income of $38,832 or less the rate will be 40% of

the first $500 and 20% of the remainder (maximum $100 enhanced grant plus the normal grant)

For families with qualifying net income between $38,832 and $77,769 the rate will be 30% of the first $500 and 20% of the remainder (maximum $50 enhanced grant plus the normal grant)

The following rules apply to these new enhanced CESGs: The qualifying net income figure is the family net income used to determine the

Child Tax Benefits for the child for January of the contribution year. That is, the family net income of the second preceding taxation year.

The enhanced rate will only apply to contributions made in the year and not to “make-up” contributions for prior years.

If the contributor to the RESP is not the primary caregiver (i.e. recipient of the Child Tax Benefit) then the enhanced rate will only apply if the CCTB recipient consents.

If more than one RESP has been established for the child, the enhanced rate applies to a maximum of $500 contributed jointly to all RESPs where the child is the beneficiary.

In order to be eligible for the CESG the RESP must be stared before the beneficiary turns 15 years old.

If amounts are withdrawn from the RESP and not used for educational purposes then the enhanced rate will not apply to contributions until the amounts withdrawn are re-contributed. This is to ensure that taxpayers do not withdraw funds from the RESP and re-deposit them to have the enhanced grant applied to the contribution.

Canada Learning Bond The Canada Learning Bond is an entitlement of up to $2,000 that will be made for each child born on or after January 1, 2004, providing that the National Child Benefit Supplement (NCB) is paid on behalf of the child. This requires the filing of tax returns and reporting of net family income. The first time a child becomes eligible under the NCB, the amount of the Canada Learning Bond entitlement is $500 plus an additional $25 to cover the cost of opening an RESP. This may happen either in the year of birth or in a subsequent year if the family net income is too high in the year of birth. The entitlement is $100 in each subsequent year that the family qualifies for the NCB until the year the child turns 15. Once 16, the CLB is no longer allocated to the child.



In order to turn the entitlement into real money, the Canada Learning Bond must be transferred into a Registered Education Savings Plan for the child. This can be done at any time before the child turns 21. Prior to age 18, the primary caregiver must authorize the transfer. If the CLB is not transferred to an RESP by the time the child turns 21, the entitlement will be lost. The Canada Learning Bond transfers will not otherwise affect the limits of contributions to the RESP; however, Canada Learning Bond amounts will not be eligible for the Canada Education Savings Grant.

Lifelong Learning Plan As you learned in Chapter 9, the Lifelong Learning Plan (LLP) allows individuals to withdraw funds from their RRSPs in order to finance their own education, or that of their spouse or common-law partner, without including the amount in income. Withdrawals must be repaid to the taxpayer’s RRSP over a ten-year period, beginning no later than 60 days following the fifth year after the first withdrawal is made. Earlier repayment may be required if a student does not attend school full-time for a minimum of three months in any two consecutive years.


Student Loan Interest Many students finance their post-secondary education with student loans. Students may claim a non-refundable tax credit for the interest paid on loans obtained under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or a similar provincial law. Students can claim the amount in the year the interest was paid, or in any of the following five years. Only the student who owes the interest can make the claim, even if someone else actually made the payment (e.g., a parent or spouse or common-law partner). Students may claim only interest that has actually been paid; a claim is not allowed for forgiven interest, or interest that has accrued but remains unpaid. The claim is made on Line 319 of Schedule 1, and must be supported by receipts from the financial institution to which the loan payments were made. Consult your provincial supplement to determine how student loans are treated for provincial tax purposes.




Tuition Fees Eligible tuition fees include tuition and related admission fees, charges for the use of library or laboratory facilities, mandatory computer services fees, fees for examinations, degrees or diplomas, rereading of examination papers, student membership fees that are directly related to an academic program and its administration, and certain ancillary fees that must be paid by all students, such as athletic and health service fees. Tuition fees do not include the cost of textbooks, student association fees, or board and lodging. Tuition fees must meet the conditions below in order to be claimed on the return.

For Specified Courses at Specified Institutions Tuition fees may be claimed only for: post-secondary courses taken at a university, college, or other educational

institution in Canada; or courses that develop or improve the taxpayer’s occupational skills, taken at an

institution in Canada certified by Human Resources and Social Development Canada (HRSDC), provided the taxpayer is at least sixteen years of age on December 31 of the taxation year.

This means that post-secondary courses taken at a university, college or similar institution may be claimed without regard to age or occupational requirement. For courses taken at other institutions, however, judgment must be used to decide whether or not the course “develops or improves” an occupational skill. The rule is that a course must be directly related to the student’s current or intended occupation in order to be eligible for the tuition credit. Otherwise the purpose of enrolment is not regarded as being to acquire occupational skills; instead, the purpose of the course is considered to be simply personal interest or self-development, and no claim can be made. For example, driving lessons do not qualify unless a taxpayer is taking them in order to seek employment as a driver. Likewise, fees paid to flying schools are eligible only if the student is taking flying lessons to become a commercial pilot or a professional instructor.

Fees Over $100 Taxpayers may claim tuition fees on their tax returns only if they are over $100. If separate fees are paid for different courses and the total of all fees paid to the same institution is over $100, the tuition fees can be claimed even if the individual receipts are under $100. However, if separate fees are paid to different institutions, and the payment to each institution is $100 or less, the fees cannot be claimed, even if the total amount paid exceeds $100.



Tuition Fees Paid By Others If tuition fees are paid by a federal or provincial job training program, by the individual’s employer, or by the employer of the individual’s parent, and no related amount is included in income, the tuition fees do not qualify. Also, fees paid on a taxpayer’s behalf by a federal program designed to assist athletes do not qualify.

Fees Paid For the Taxation Year Fees qualify if they were incurred for the taxation year (i.e., the period from January 1 through December 31). This means that tuition fees are claimed for the taxation year in which they are incurred, rather than the taxation year in which they are paid.

Institutions outside Canada Tuition fees paid to educational institutions outside Canada are subject to somewhat different rules. Such fees can be claimed if: the institution is a university; the student is in full-time attendance in a course leading to a degree; and the course is at least thirteen consecutive weeks in duration. If a taxpayer meets all three of these requirements, the over $100 fee rule does not apply. However, if tuition fees are paid by the individual’s employer or the employer of the individual’s parent and no related amount is included in income, the tuition fees do not qualify.

Commuters Students residing near the U.S. border throughout the year who commute to a U.S. school providing post-secondary level courses may claim tuition fees paid to such institutions provided the amount is over $100. However, if tuition fees are paid by the individual’s employer or the employer of the individual’s parent and no related amount is included in income, the tuition fees do not qualify.

Deemed Residents Taxpayers who are deemed to be resident in Canada by reason of having spent more than 183 days in Canada may claim tuition fees paid to institutions outside Canada under the same rules as apply to Canadian institutions.



Receipts A student must have official income tax receipts in order to claim tuition fees. For fees paid to Canadian institutions, the taxpayer must have an official tuition

receipt or Form T2202A (see Illustration 11.4) issued by the educational institution.

For fees paid to educational institutions outside Canada, the taxpayer must have the institution complete Certificate TL11A (university outside Canada), TL11C (commuter to the U.S.), or TL11D (deemed resident).

For fees paid to a flying school or club in Canada, the taxpayer must have the flying school or club complete Form TL11B.

Claiming the Tuition Credit Eligible tuition fees are claimed on Line 320 of the federal Schedule 11

Schedule 11




Illustration 11.3




Education and Textbook Amounts In addition to tuition fees, students are allowed to claim a federal education amount of $400 for each month during which they are full-time students, plus $120 for each month during which they are part-time students. To claim the amount, they must be enrolled in a qualifying educational program at a designated educational institution. Students eligible to claim the federal education amount may also claim the federal amount for textbooks of $65 for each month during which they are full-time students, plus $20 for each month during which they are part-time students.

Full-time Student To be eligible to claim the full-time education amount, a student must be enrolled in a full-time program, i.e., a program lasting at least three consecutive weeks that requires the student to spend at least ten hours per week on structured course work. However, full-time attendance at the institution is not required. This means that full-time students enrolled in distance education programs or correspondence courses may be eligible for the education amount. An exception is made for students who are disabled or have a mental or physical infirmity which affects them to the point that they cannot reasonably be expected to enrol in their programs on a full-time basis. Such students may claim the full-time education amount even if they are only part-time students.

Part-time Student To be eligible to claim the part-time education amount, a student must be enrolled in a part-time program, i.e., in a program lasting at least three consecutive weeks that requires the student to spend at least 12 structured hours per month on courses in the program. Note that a student may not claim both the full-time education amount and the part-time education amount in respect of the same month.

Qualifying Educational Program A qualifying educational program is a post-secondary course of at least three consecutive weeks duration that requires the student to spend at least ten hours per week (for full-time students) or 12 hours per month (for part-time students) on courses or program-related work. However, in relation to a particular student, it does not include programs for which the student: receives an allowance, benefit, grant or reimbursement of expenses in connection

with a program (e.g., free board and lodging or other allowance received from a nursing school while a nurse in training); or

is reimbursed for the cost of the course, other than by scholarships or similar award money received.



However, students who receive taxable assistance under the following programs are eligible to claim the education amount: Part II of the Employment Insurance Act (or a similar program provided by a

province or territory under a Labour Market Development Agreement); or A training program established under the authority of Human Resources and

Social Development Canada (HRSDC), such as the Employability Assistance for People with Disabilities initiative or the Opportunities Fund for Persons with Disabilities.

If the assistance reported on a T4E qualifies for the education amount, it will be identified in Box 20. The student still needs a T2202 or T2202A indicating the number of part-time or full-time months eligible for the claim.

Designated Educational Institution A designated educational institution is: a university, college, or other educational institution in Canada that is

designated by a province as a specified educational institution under the Canada Student Financial Assistance Act or the Québec Act Respecting Financial Assistance for Students;

an institution in Canada that is certified by Human Resources and Social Development Canada (HRSDC) to be an educational institution providing courses that furnish a person with skills for or improve his or her skills in an occupation;

a university outside Canada at which the student is enrolled in a course of not less than thirteen weeks duration leading to a degree; or

an institution in the United States that is a university, college, or other educational institution providing courses at a post-secondary level to which a student, who resided in Canada near the Canada – U.S. border during the whole year, commuted.

Information Slips To claim the education amount, the student must have either Form T2202 or Form T2202A (see Illustration 11.4) if they are enrolled in an institution in Canada. Students enrolled in a foreign institution may claim the education amount as specified on their TL11A or TL11C. These forms are issued by the educational institution to confirm enrolment in a qualifying program and indicate the number of months enrolled, on either a full-time or part-time basis. Issuance of such a receipt, however, does not necessarily mean that the student is eligible to claim the education amount. This is because although the program may qualify, the student may not. For example, students who are reimbursed for the cost of the course do not qualify. Part-time students claiming the full-time education amount because they are infirm, rather than disabled must have a physician or optometrist complete Part 3 of Form T2202 (not shown) or provide a signed letter certifying the impairment.



Claiming the Education and Textbook Amounts The education and textbook amounts are calculated as ($400 + $65) times the number of full-time months, plus ($120 + $20) times the number of part-time months, as shown on Form T2202 or T2202A. The result is entered at Lines 321 and 322 of the federal Schedule 11.

Schedule 11 Federal Tuition, Education and Textbook Amounts The federal Schedule 11, shown in Illustration 11.3, is used to determine the amount of tuition, education and textbook amounts that a student can claim on Line 323 of his or her own Schedule 1, and to specify the unused amount that the student wishes to carry forward or transfer to a spouse or common-law partner, parent, or grandparent. Tuition fees and education and textbook amounts must first be applied to reduce a student’s own taxable income to zero. The amount required is determined by subtracting the student’s federal non-refundable credits on Lines 1 to 17 on Schedule 1 from his or her taxable income (if the answer is negative, use zero). The lesser of this number, and the total tuition and education amounts, must be claimed by the student on Line 323. If the amount claimed by the student on Line 323 is less than the total tuition, education and textbook amounts, some or all of the unused amount may be transferred to a designated individual (as explained below). Any unused amount not transferred may be carried forward for the student’s use in later years. Students must indicate at the bottom of Schedule 11 the amount they wish to transfer (on Line 24) and the amount they wish to carry forward (on Line 25). Amounts carried forward are entered on Line 1 of the student’s Schedule 11 the following year. Once an amount has been carried forward, it cannot be transferred later.

Transfer of Tuition, Education and Textbook Amounts Students who wish to transfer some or all of their unused tuition, education and textbook amounts must be aware of the restrictions involved, both as to whom transfers can be made, and as to the amount that can be transferred. We shall discuss each of these in turn.

Designated Person A student can transfer unused amounts to one of the following designated individuals: a spouse, common-law partner, parent, grandparent, or a spouse’s or common-law partner’s parent or grandparent. The transfer is subject to the following restrictions: Students who are married or living common-law may transfer unused amounts

to a parent or grandparent (including an in-law) only if the spouse or common-law partner does not claim a spouse or common-law partner amount on Line 303 or a transfer amount on Line 326.



The only tuition, education and textbook amounts that are eligible for transfer are those that students are eligible to claim on their own tax returns.

To transfer these amounts, the student must sign an authorization form that designates the individual to whom the amount is being transferred. Authorization forms are provided on the back of Form T2202A and on Form T2202, but not on most official tuition receipts. Students with tuition receipts may obtain a blank copy of Form T2202 and use the authorization section to transfer tuition fees (in this case, the official tuition receipts should be attached to the signed authorization).

Illustration 11.4

Ken is a full-time student whose T2202A is shown below.

Ken’s taxable income for the year is $10,474. His only claim on Lines 1 to 17 on Schedule 1 is for the basic personal amount. He wants to carry forward his unused tuition, education and textbook amounts to use later on. He has a carryforward of $200 from last year. On his federal Schedule 11, Ken enters his carryforward of $200 at the top, then adds his tuition, education and textbook amount for this year ($3,500 + 8 x $400 + 8 x $65 = $7,220), for a total of $7,420. He needs $154 to reduce his taxable income to zero ($10,474 – $10,320), so this is the amount he claims on Line 323 of his Schedule 1. The balance available for carryforward or transfer is $7,266 ($7,420 – $154). Since Ken wants to carry the whole amount forward, he enters nothing on Line 24 and shows the carryforward amount on Line 25. Ken cannot decide later to transfer this amount to someone else. Next year, Ken will enter his carryforward of $7,266 on Line 1 of his federal Schedule 11.



Transfer Amount The maximum amount of tuition, education and textbook amounts that can be transferred to a spouse, common-law partner, parent or grandparent is the lesser of: $5,000; and the total current-year tuition fees and education amounts minus the amount of

the current-year fees claimed by the student on Line 16 of Schedule 11. Because carryforward amounts are used first, this means that a carryforward may increase the amount of the current-year credits that may be transferred. The calculation is carried out on Schedule 11, as explained below.

Illustration 11.5

Kim is the student whose Schedule 11 is shown in Illustration 11.3. Refer to that form as you read through this example. Kim’s tuition fees were $5,100, and her T2202A shows that she was enrolled full-time for 8 months. Therefore, her current-year tuition, education and textbook amounts add up to $8,820, as shown on Line 9. Kim has a taxable income of $13,100 for the year, and her non-refundable tax credits on Lines 1 to 17 of her tax Schedule 1 add up to $12,065. Therefore, she requires a total of $1,035 (see Line 13) to reduce her taxable income to zero ($13,100 – $12,065). Kim wants to transfer the maximum amount to her husband, John. If she had no carry forward from 2008, she would be able to transfer only $3,965 ($5,000 – $1,035). However, because Kim has a carryforward of $400, she can transfer $4,365 ($5,000 – $635), as shown on Line 23. This is because she has to use only $635 of her current-year amount (see Line 15) on her own return. The designation portion of her T2202A form is shown below.



Since Kim wants to transfer the maximum possible, she enters $4,365 on Line 24. The remaining $3,820 is carried forward.

Tuition, Education and Textbook Amounts Transferred to a Parent or Grandparent If amounts are transferred to a parent or grandparent, the designated individual claims the federal transfer amount on Line 324 of his or her federal return.

Tuition, Education and Textbook Amounts Transferred to a Spouse or Common-law Partner

If amounts are transferred to a spouse or common-law partner, the transfer is claimed on the federal Schedule 2 (as shown in Illustration 11.6), along with the transfer of the age amount, disability amount and pension income amount, as applicable. To claim a transfer of tuition, education and textbook amounts to a spouse or common-law partner, first complete the student’s Schedule 11 and calculate the amount available for transfer. Enter the amount the student actually wishes to transfer on Line 24, and carry this amount to Line 360 of the spouse’s or common-law partner’s Schedule 2. The rest of the federal Schedule 2 is completed in the usual way.

Illustration 11.6

Kim, from Illustration 11.5, is transferring her unused tuition and education amount to her husband, John. Therefore, after completing her federal Schedule 11, as shown in Illustration 11.3, she designates the transfer amount of $4,365 on her T2202A, and names John as the designated individual. To make the transfer, John enters $4,365 on Line 360 of his Schedule 2 and completes it as shown below:

John then transfers $4,365 to Line 326 of his Schedule 1.



Provincial Tuition Fees and Education Amounts Consult your provincial supplement for the provincial tuition fees and education amounts for your province. Most provinces do not allow an amount for textbooks.

Interprovincial Tuition, Education and Textbook Amount Transfers and Carryovers Since some provinces have more generous tuition, education and textbook amounts than others, taxpayers who move to a different province many not be able to carry forward the full amount of their provincial carryovers to the new province. In addition, transfers to a designated individual residing in another jurisdiction are subject to special rules. A summary of these rules may be found in the TTS Reference Book.


Moving Expenses Students who move to begin full-time attendance at an educational institution (whether or not in Canada) may technically deduct eligible moving costs if their new place of residence is at least forty kilometres closer to the institution than their old residence, however, their claim is limited to the taxable amount of their scholarship and bursary income. Because the award income for most full-time students will be totally exempt, most full-time students will not be eligible to claim moving expenses for their moves to attend school. Students who, after their courses are finished, move in order to commence employment (including summer employment) may claim eligible moving expenses against their earned income at the new work location. Again, the new residence must be at least 40 kilometres closer to the work location than the old residence.

Adult Basic Education Assistance Adults who receive government assistance to upgrade their education are required to include the amount in income. However, if the training consists of primary or secondary education level skills, the assistance does not qualify for the tuition tax credit. To remedy this situation, an offsetting deduction is available. The amount qualifying for the deduction is reported in Box 21 of the T4E slip and the deduction is claimed on Line 256.


Complete Q12.



Summary In this chapter, you learned about several types of income, credits and deductions related specifically to students.


The amount of scholarships, bursaries and fellowships is exempt from tax if the taxpayer is eligible to claim the education amount or is for elementary or secondary education. Otherwise, the first $500 is exempt from tax.

Some training allowances are taxable and some are not. The agency paying the allowance is responsible for determining the correct tax treatment and issuing the appropriate slip.

Registered retirement savings plans (RESPs) allow taxpayers to invest for their children’s education, without being taxed on the income earned by the investment.

The Canada Education Savings Grant provides a matching government grant equal to 20% of annual RESP contributions for eligible beneficiaries, to a maximum of $500 per year.

Low-income families may be eligible for enhanced CESG rates. Children in families eligible to receive the National Child Tax Benefit

Supplement may qualify for the Canada Learning Bond. Students may claim a tax credit for interest on loans obtained under the Canada

Student Loans Act, the Canada Student Financial Assistance Act, or a similar provincial law. The credit can be claimed in the year paid, or in any of the following five years.

Students may claim tuition fees for specified courses at specified institutions, if the total fee is over $100, and it was not paid by a government program or employer.

Students may claim the education amount for each month during which they were enrolled in a qualifying educational program at a designated institution. The education amount is $400 for each full-time month and $120 for each part-time month.

Students may claim the textbook amount for each month in which they qualify to claim the education amount. The textbook amount is $65 for each full-time month and $20 for each part-time month.

Students who do not require all their tuition and education amounts to reduce their taxable income to zero may transfer some or all of it to a designated person (spouse, common-law partner, parent, or grandparent) or carry it forward to be used in a later year.



The amount that can be transferred is limited to the lesser of $5,000 and the total current-year tuition fees and education amounts, minus the amount of the current-year fees claimed by the student on Line 16 of Schedule 11.

Amounts carried forward can never be transferred at a later date. For most full-time students cannot make a claim for moving expenses to attend

school as such a claim would be limited to the taxable portion of their award income which is normally zero.

Adults who receive government assistance to upgrade their education may be able to deduct the assistance that was included in income.



Chapter 12 – Senior Citizens

Introduction This chapter covers topics that, while sometimes applicable to other taxpayers, are likely to be of particular interest to taxpayers age sixty-five or older. The chapter begins with the rules for reporting various types of retirement and pension income. Then the non-refundable credits available to senior Canadians are discussed. The chapter concludes with a review of the calculation of instalment payments.


Report Old Age Security benefit payments; Report Canada or Québec Pension Plan retirement benefits; Report pension and annuity income; Report payments from a registered retirement income fund; Report various types of payments made from a registered retirement savings

plan; Report retiring allowances on the T1 return; Determine eligibility for pension-income splitting and complete a T1032 - Joint

Election to Split Pension Income. Claim the various non-refundable credits to which a senior citizen is entitled;

and Determine when installment payments are required, and calculate the amount

to be remitted each quarter.

268 Chapter 12 – Senior Citizens


Glossary Before you read this chapter, review the following terms in the glossary: Annuity; Income-averaging annuity contract; Matured RRSP; Old Age Security; Pension income amount; Registered retirement income fund; Retiring allowance; Superannuation; and Unmatured RRSP.



Old Age Security Benefits Old Age Security (OAS) is a monthly benefit paid to eligible persons aged sixty-five or older. It is not linked to employment history, nor must a recipient be retired from employment. Canadian residents are eligible for the OAS benefit if they are Canadian citizens or legal residents, and have been resident in Canada for a minimum of ten years. (Those who have resided in Canada for less than 40 years may not receive the full amount). The benefit must be applied for; it is not sent automatically. If application is made in time, payments may begin the month following the individual’s sixty-fifth birthday. OAS recipients receive a T4A(OAS) slip each year from Human Resources Development Canada. The net amount, from Box 18 of the slip, is entered on Line 113 of the T1 return. In some cases, the net amount to include in income may be less than the gross amount actually paid in the year, which is shown in Box 19. This will occur if a recipient had to repay an amount previously received. If income tax is withheld, the amount will be shown in Box 22 of the T4A(OAS) slip. You should enter this amount on Line 437 of the return, along with any other tax deducted at source from other information slips.

T4A(OAS) slip

The amount of the OAS benefit is adjusted every three months. For taxpayers receiving full benefits, the monthly Old Age Security payments for 2009 were $516.96 per month. For a taxpayer receiving full benefits for the whole year, the total OAS benefit for 2009 was $6,203.52. In addition to the regular Old Age Security payments, some low-income pensioners receive additional payments called Guaranteed Income Supplements (GIS) from the federal or provincial governments. Pensioners aged sixty to sixty-four years who are spouses or partners of pensioners receiving the OAS benefit and the GIS may also receive an allowance (formerly called the Spouse’s Allowance) from the federal government. The amount of the allowance corresponds to the total of the OAS benefit and GIS. Both the GIS and allowance benefits depend on income, and both are non-taxable. The amount of “Net federal supplements paid” (including either the GIS or allowance benefit) is shown in Box 21 of the T4A(OAS) slip. These supplements must be reported on Line 146 and, because they are non-taxable, are deducted on Line 250. In the past, GIS and allowance recipients had to apply for benefits each year. However, since benefits are based on prior year incomes, most recipients need not file new applications if they (and their spouses or common-law partners, if applicable) file income tax returns by April 30.





Repayment of Old Age Security Benefits As mentioned in Chapter 7, taxpayers with incomes in excess of certain limits are required to repay a portion of any EI or OAS benefits they receive. The OAS repayment threshold is $66,335 for 2009. This means that taxpayers with incomes in excess of this amount must repay a portion of the Old Age Security benefits that they received in the year. This repayment, often called a “clawback,” is equal to the lesser of: the total of the Old Age Security benefits received; and 15% of the amount by which the individual’s Line 234 income exceeds $66,335. When performing this calculation, the Line 234 amount must first be reduced by any EI benefit repayment, if applicable. The repayment amount can be calculated manually, or by using the “Line 235 — Social benefits repayment” section of the Federal Worksheet.

Illustration 12.1

In 2009, Herm received $6,203.52 in Old Age Security benefits, while his net income for the year was $67,167. He did not receive any EI benefits. His OAS clawback is calculated as the lesser of: $6,203.52; and ($67,167 – $66,335) x 15% = $124.80. Herm will have to repay $124.80 of his OAS benefits; he does this by entering $124.80 on Line 422, where it is added to his total payable. Because he is paying back $124.80 of his OAS, he is allowed to deduct the repayment at Line 235 so that it is not included in his net or taxable income.

Monthly Withholding of OAS Clawback Each month, the federal government withholds 1/12 of the estimated OAS clawback from OAS payments made to individuals who were subject to clawback in the prior year. Because the actual clawback amount depends on a person’s Line 235 amount, which is not known until the end of the year, the government estimates the clawback. For the first six months of the year, this estimate is based on the taxpayer’s income in the second preceding tax year. For the last six months, the estimate is based on the taxpayer’s income for the previous year. The amount withheld is reported as income tax deducted in Box 22 of the T4A(OAS) slip. At the end of the year, when they file their returns, taxpayers calculate the actual clawback amount. If they paid too much, they receive a refund or credit against other taxes owing; if they paid too little, it is deducted from their refund or added to their taxes owing.



Illustration 12.2

Herm, from the previous example, had a net income of $68,000 in 2007 and $70,000 in 2008. Since the government used his prior years’ income to estimate his 2009 clawback withholding, Herm was subject to a monthly withholding as follows: January to June 2009: $20.81 calculated as ((68,000 – $66,335) x 15%) ÷ 12 = $20.81 July to December 2009: $45.81. calculated as ((70,000 – $66,335) x 15%) ÷ 12 = $45.81 The amount withheld ($20.81 x 6 + $45.81 x 6 = $399.72) was reported in Box 22, as shown in his T4A(OAS) slip below:

At the end of the year Herm calculated his actual OAS clawback for the year as explained in Illustration 12.1. The actual clawback of $124.80 is entered on Lines 422 and 235. The $399.72 which Herm has already paid is reported on Line 437.



CPP Retirement Benefits Canada Pension Plan retirement benefits are intended to partially offset loss of income due to retirement. Contributors to the plan can apply for CPP retirement benefits at the normal retirement age of sixty-five, regardless of whether or not they actually retire. If they do so, however, they can make no further contributions to the plan. Alternatively, taxpayers can elect to postpone the receipt of benefits until the age of seventy; in this case, they can continue to make contributions to the plan until the month they turn seventy.



This would only be beneficial if the taxpayer’s previous contributions to the plan are insufficient to earn the maximum pension and additional contributions will increase the amount of the pension. Contributors can also apply for CPP benefits early, between the ages of sixty and sixty-five, provided they have substantially retired. However, the amount of the monthly benefit will be reduced in this case. Again, once retirement benefits begin, no further CPP contributions can be made, even if the person later takes up employment of some kind. CPP retirement benefits received by a taxpayer are shown in Box 14 (and included in Box 20) of a T4A(P) slip and are reported on Line 114. Tax withheld is shown in Box 22.

T4A(P) slip

Illustration 12.3

David has been retired for several years. He receives CPP benefits of $4,840. His T4A(P) is shown below:

David will report $4,840 on Line 114, and will enter the $484 tax withheld on Line 437.

Division of CPP Benefits between Spouses or Common-law Partners Under certain circumstances, spouses and common-law partners can apply to have their CPP retirement benefits divided between them. To be eligible for this division, both spouses or partners must be at least sixty years of age and must have applied for their retirement benefits. A division of benefits can be made only by applying to Social Development Canada – it cannot be done when preparing the returns. Each partner can apply to receive an equal share of the retirement pensions they each earned during the years they were together. The amounts depend on how long the couple lived together and their contributions to the Plan during that time.



For example, if the couple lived together for 20 years during both their contributory periods: the pension earned by each of partner during the 20-year period are added

together and divided equally between them (even if one partner did not earn any pension during that period) and

each partner keeps the rest of their pension earned outside the time they lived together.

The combined total amount of the two pensions stays the same. This income-splitting strategy is advantageous if the spouse or common-law partner with the higher income also has the higher CPP (as is usually the case). It may result in some of the income being taxed at a lower rate, and may also reduce or eliminate the OAS clawback or the age amount reduction, which is discussed later in this chapter. If a division of payments has been made, the taxpayers’ T4A(P)s will reflect the amount to report on each taxpayer’s return. The amount to report on Line 114 is always the exact amount shown on the T4A(P).


Pension Income Besides OAS and CPP, seniors may receive retirement or pension income from a variety of other sources. Pension income may be reported on Lines 115, 129, 130 or, in rare cases, on Line 121. Some types of retirement income qualify for the pension income amount (which is discussed later in this chapter), and some do not. The rules for reporting the various types of pension income are discussed on the following pages, and are summarized in the “Reporting Guide for Retirement Income” shown in the TTS Reference Book. The guide is arranged by information slip and box number. You should study the guide as you read the remainder of this chapter. At this point, look through it to obtain an overview of pension income reporting – note which information slips are used, and on which lines of the T1 amounts are entered.

Reporting Guide for Retirement Income

Note that, for reporting purposes, taxpayers are divided into three distinct “groups.” The group to which a taxpayer belongs may determine on which line the income is to be reported and whether or not it is eligible for the pension income amount. The three groups are as follows: 1. those who are 65 or over as of December 31; 2. those who are under 65 as of December 31, but who are receiving benefits due to

the death of a spouse or common-law partner; and 3. those who are under 65 as of December 31 who are receiving the benefits for a

reason other than the death of a spouse or common-law partner.



The phrase “due to death of a spouse or common-law partner” is an important qualifier in the “Reporting Guide for Retirement Income.” The phrase refers to situations in which an annuity or pension was being paid to a taxpayer, and the death of that taxpayer resulted in the payments being redirected to the spouse or common-law partner as a beneficiary. However, if a taxpayer had not begun to receive a pension or annuity, and the amount in that taxpayer’s plan was transferred to a spouse’s or partner’s plan upon the death of the taxpayer, any future pension or annuity paid to the spouse from that plan is not considered as having been received due to the death of a spouse or common-law partner. The most common types of pension income are discussed in the next several sections.

RPP Income A registered pension plan is a superannuation or pension plan, registered with the CRA, which is used to fund an employee’s pension upon retirement. RPP pension income is reported on a T4A slip. If it is paid out periodically, it appears in Box 16. If it is paid out in a lump sum, it appears in Box 18. Tax withheld is shown in Box 22.

T4A slip

RPP Periodic Payments Periodic payments of RPP pension income are generally received in the form of a monthly “company pension.” This type of income is shown in Box 16 of the T4A slip, and should be entered on Line 115 of the tax return; it always qualifies for the pension income amount.


RPP Lump-sum Payments Lump-sum payments from RPPs are shown in Box 18 of the T4A slip and are reported on Line 130; they never qualify for the pension income amount. In some circumstances, lump-sum payments from RPPs may be eligible for transfer to other registered plans, thus deferring some or all of the tax which would otherwise be payable. Such transfers are discussed in more detail later in this chapter.





DPSP Income A DPSP (deferred profit sharing plan) is an arrangement, registered with the CRA, by which an employer shares the profits from his or her business with all or a designated group of employees, usually by paying a percentage of profits into the plan. Unlike unregistered employee profit sharing plans, in which the employee’s share in the earnings must be included in income each year as reported on a T4PS slip (see discussion in Chapter 2), the earnings of a DPSP are allowed to accumulate in the plan tax-free until they are actually paid out. Typically, a DPSP requires that a plan member work for the employer for a specified period of time before becoming entitled to receive benefits from it. After this period has expired, the plan benefits are said to have become “vested” in the employee. Any such vested benefits must be paid out to the employee or his or her beneficiary within ninety days after the employee leaves the job, turns 71, or dies. These amounts may be paid as a lump sum, an annuity, or as instalment payments.

DPSP Annuity or Instalment Payments Annuity or instalment payments from a DPSP are shown in Box 24 of a T4A slip and should be identified by a notation in the footnotes area of the slip that states “Box 24, DPSP annuity or instalment payments $XXX,” and code number “15” in Box 38. Taxpayers included in Groups 1 and 2 on the “Reporting Guide for Retirement Income” should include this amount on Line 115 and claim the pension income amount on Line 314. Other taxpayers should include the amount on Line 130, and may not claim the pension income amount on Line 314.

DPSP Lump-sum Payments Lump-sum payments from a DPSP are reported in Box 18 of the T4A slip. They are always entered on Line 130 and never qualify for the pension income amount. In certain cases, lump sums may be transferred to other registered plans, as explained later in this chapter.


Foreign Pensions A retirement pension from a foreign country is fully taxable in Canada unless it is excluded from income by the Income Tax Act, or its tax treatment is modified by a tax treaty with the foreign country. Canada has established tax treaties with many countries to avoid the double taxation of certain income. As a result, some foreign pensions may be partially or fully exempt from tax in Canada. Your TTS Reference Book contains a chart that shows which pensions from certain foreign countries are taxable, and which are not. To find out about the tax treatment of pensions from countries not on the chart, you must consult the relevant tax treaty.

Effects of Tax Treaties on Foreign Pensions



Always report the full amount of foreign pensions, in Canadian dollars, on Line 115 of the T1 return. Any portion that is non-taxable is then deducted on Line 256. This ensures that the full amount of any foreign pension is always included in a taxpayer’s net income, while the non-taxable portion is excluded from taxable income. Only the taxable portion of a foreign pension qualifies for the pension income amount on Line 314. The taxable portion is obtained by subtracting the tax-exempt portion of a particular pension (from Line 256) from the full amount of that same pension that has been included in income on Line 115.

Illustration 12.4

Nicole receives a social security pension for the U.S. in the amount of $5,000CAN. According to the chart, only 85% of social security benefits from the U.S. are subject to Canadian tax. Therefore, Nicole will report the full amount of $5,000 on Line 115 and deduct the non-taxable portion of $750 (15% of $5,000) on Line 256. Thus, the taxable portion is 85%, or $4,250, and only this part is eligible for the pension income amount.



RRIF Income A registered retirement income fund (RRIF) is a plan registered with the CRA that is set up to provide retirement income. The income arises from funds transferred into the plan, usually from other registered plans, such as RRSPs, RPPs, or other RRIFs. Every RRIF must pay out a specified percentage of its value each year to the annuitant as income. This amount is called a “minimum amount” and is determined by multiplying the RRIF’s value at the beginning of the year by a factor that varies with the taxpayer’s age. Since the minimum amount is calculated on a declining balance basis, the payments can be spread over the annuitant’s lifetime. However, the annuitant may withdraw more than the minimum amount in a given year, if the RRIF contract allows. Any amount over the minimum is called an “excess” amount. Ordinary payments from an RRIF are reported in Box 16 of a T4RIF slip; this includes the excess amount (if any) reported in Box 24.

T4RIF slip

Taxpayers in Groups 1 and 2 on the “Reporting Guide for Retirement Income” should include the Box 16 amount on Line 115 and claim the pension income amount on Line 314. Other taxpayers should include the amount on Line 130, and not claim the pension income amount on Line 314.



Tax is not deducted at source from minimum amounts, but may be deducted from excess amounts. If so, the tax withheld appears in Box 28. If the RRIF was funded by an RRSP to which the annuitant’s spouse or common-law partner contributed, a “Yes” response is shown in Box 26. In this case, the contributor spouse’s or partner’s name and SIN will be indicated in Boxes 32 and 34. The contributor spouse or common-law partner may have to include a portion of any excess amount (but not the minimum amount) in income. To determine how to split the income, the annuitant should complete Form T2205 Amounts from a Spouse or Common-law Partner RRSP or RRIF to Include in Income for ____. Excess amounts from a RRIF may be directly transferred to another RRIF or an RRSP, or they can be used to purchase an eligible annuity. These transfers are discussed in more detail later in this chapter.

Illustration 12.5

Peggy is 67 years old. She received the T4RIF shown below:

Because Peggy is in Group 1, she will report $3,450 on Line 115, and $40 on Line 437. She can also claim the pension income amount on Line 314. The amount in Box 24 is already included in Box 16 and is not reported separately on the return.

Spouse or Common-law Partner as Beneficiary of the RRIF When a RRIF annuitant dies, the surviving spouse or common-law partner may be designated as the new annuitant. If so, the regular payments made after death will be reported in Boxes 16 and 24 of the T4RIF issued in the name of the surviving spouse or common-law partner. Alternately, all of the property in the RRIF may be paid to the surviving spouse or common-law partner as beneficiary of the RRIF. In this case, the fair market value of the property is reported on a T4RIF issued to the surviving spouse or common-law partner. The minimum amount for the year will appear in Box 16, and the rest will appear in Box 24.



The surviving spouse or common-law partner may transfer the amount in Box 24 directly to his or her own RRIF, RRSP, or use it to buy an eligible annuity. These transfers are discussed in more detail later in this chapter.

Other Payments from a RRIF In addition to minimum and excess amounts, the following types of payments may also be received from a RRIF.

Deemed Receipt on Death When a RRIF annuitant dies, the fair market value of the plan is deemed to have been received by the deceased immediately prior to death (unless a surviving spouse or common-law partner has been designated as the RRIF annuitant or beneficiary, as explained above). This amount is reported in Box 18 of the T4RIF and is ordinarily included on Line 130 of the deceased’s final return. However, part or all of the income may be reported on a beneficiary’s return instead, if the estate receiving the RRIF is left to a surviving spouse or common-law partner, or if the estate or RRIF property is left to a financially dependent child or grandchild. To accomplish this, Form T1090 Death of a RRIF Annuitant–Designated Benefit must be completed and attached to the return. In this case, the amount is reported on the beneficiary’s return and may be eligible for transfer to the beneficiary’s RRSP, RRIF or eligible annuity. These transfers are discussed later in this chapter.

Deemed Receipt on Deregistration An amount deemed to have been received by a taxpayer because the plan ceased to meet the rules under which it was registered will be reported in Box 20 of a T4RIF. This amount is included in income on Line 115 or 130, as indicated in the “Reporting Guide for Retirement Income.”

Other Income or Deductions Amounts resulting from the acquisition and disposition of property in the plan, or payments to a beneficiary other than a spouse or common-law partner, are reported in Box 22. Positive amounts are declared on Line 130; negative amounts are deducted on Line 232 of the return.



Unregistered Annuities An annuity is an investment that pays an annual income for life or a fixed period to the owner (the annuitant). In some cases the payments may continue to be paid to a surviving spouse or common-law partner or other beneficiary after the annuitant’s death. An “unregistered annuity” is simply an annuity that is not registered with the CRA.



Payments from an unregistered annuity consist partly of contributions made by the annuitant (the capital portion) and partly of income earned on those contributions (the earnings portion). Only the earnings portion of payments received is taxable, and therefore reported as income, because no deduction was allowed for the capital portion when the contributions were made. The taxable portion from an unregistered annuity will be shown either in Box 24 of a T4A slip or in Box 19 of a T5 slip. As shown in the “Reporting Guide for Retirement Income,” how this income is reported by individuals in Group 3 depends on which slip is issued.

Income-Averaging Annuity Contracts Income-averaging annuity contracts allow taxpayers to spread the recognition of certain types of income over a number of years. Although IAACs were abolished in 1982, taxpayers receiving payments from a previously established IAAC will have the amounts reported in Box 19 of a T5 slip or in Box 24 of a T4A slip (the footnotes area of the latter slip should identify the amount as being from an IAAC, and the Box 38 should show the number “10”). The method of reporting this income is identical to that for unregistered annuities.

Retirement Compensation Arrangements A retirement compensation arrangement is an unregistered pension plan to which both the employer and the employee may make contributions. Often it arises because of a change in the employee’s status (for instance, from a full-time employee to a consultant) or the addition of a benefit that cannot be incorporated into an existing RPP. The employer’s contributions are subject to a 50% tax which is refunded when payments from the plan are made to the employee, usually upon retirement. In the meantime, income earned by the plan is allowed to accumulate tax-free. Employees may deduct their contributions only if they are required by their contract of employment to make them, and the total does not exceed the amount contributed by the employer. Payments from an RCA are reported in Boxes 14, 16, 18 or 20 of a T4A-RCA slip. These amounts are generally reported on Line 130 of the recipient’s return. Under certain circumstances, a deduction for part of the amount may be deducted on Line 232. Tax withheld is reported in Box 22 and claimed on Line 437.

T4A-RCA slip



Illustration 12.6

David received $3,780 in benefits from his RCA. His T4A-RCA slip is shown below:

David will report $3,780 on Line 130 and claim $378 on Line 437. Since he has never contributed to his RCA, he cannot claim any amount on Line 232.

RRSP Income Registered retirement savings plans were explained in Chapter 9. Taxpayers claim deductions for their contributions to RRSPs, and the funds accumulate tax-free in the plans. Because there is an age limit for RRSPs, however, RRSP funds do not remain tax-free forever. Taxpayers must make arrangements to convert their RRSP funds to a RRIF (described above) or annuity by the end of the year in which they turn 71, or else the full value of the RRSP will be included in their income the following year.

RRSP Annuity Payments Conversion of an RRSP to an annuity allows the RRSP funds to be paid out over a period of years rather than in a lump sum (thus minimizing the tax consequences). Annuity payments from an RRSP are reported in Box 16 of a T4RSP slip. This income is reported on Line 129 of the return. The pension income amount can be claimed on Line 314 by recipients in Groups 1 and 2. Tax deducted is claimed on Line 437.

T4RSP slip



Illustration 12.7

Ken is 60 years old and single. He received $958 in annuity benefits from his RRSP, as shown on his T4RSP slip below:

Ken will report $958 on Line 129 and claim $95.80 on line 437. He is in Group 3, so he cannot claim a pension income amount for this income on Line 314.

Other Payments from an RRSP An annuity is only one type of payment that may be made from an RRSP. RRSPs that have not matured (have not been converted to an annuity) may also provide income. This income is reported on a T4RSP slip, usually in Box 18, 20, 22, 26, or 34. Report these amounts, as well as any positive amount in Box 28, on Line 129 of the recipient’s return. A negative amount (shown in brackets) in Box 28 should be deducted on Line 232. General comments about most of these items follow.

Refund of Premiums When a taxpayer dies, the value of any unmatured RRSP must usually be brought into income on his or her final return. However if the spouse or common-law partner of the deceased is the beneficiary of the RRSP, the funds may be rolled over tax-free into the surviving spouse’s or partner’s own RRSP or RRIF. If the funds are rolled over, the income is reported as a refund of premiums in Box 18 of a T4RSP slip that is issued in the name of the surviving spouse or common-law partner. The surviving spouse or common-law partner must then report the income on Line 129, but may claim an offsetting deduction for the transfer. These transfers are discussed in more detail later in this chapter.

Refund of Excess Contributions A withdrawal of excess RRSP contributions (contributions that have never been deducted) that have been certified by the CRA, by completing a Form T3012A, are reported in Box 20 of a T4RSP slip. The taxpayer must include the amount on Line 129 in the usual way, but is entitled to an offsetting deduction on Line 232.



Withdrawal and Commutation Payments All ordinary withdrawals from an RRSP, as well as amounts paid as commutation of an annuity under the plan (i.e., a lump-sum payment equal to part or all of the annuity) are reported in Box 22 of a T4RSP, and included in income on Line 129. Non-certified withdrawals of excess contributions are also reported in Box 22; an offsetting deduction may, under certain circumstances, be claimed on Line 232 by filing Form T746 with the return.

Deemed Receipt on Deregistration An amount deemed to have been received by a taxpayer because the plan ceased to meet the rules under which it was registered is reported in Box 26 of a T4RSP and included in income on Line 129.

Other Income or Deductions Amounts resulting from the acquisition or disposition of property in the plan, or payments to a beneficiary other than a spouse or common-law partner, are reported in Box 28 of the T4RSP. Positive amounts are declared on Line 129; negative amounts are deducted on Line 232 of the return. For example, when the plan acquires non-qualified property, the value of the property may have to be included in Box 28 as income. When the plan disposes of the non-qualifying property, the lesser of the proceeds and the fair market value of the property will be included in Box 28 as a negative amount thereby allowing the taxpayer to deduct that amount.

Deemed Receipt on Death An amount deemed to have been received by a deceased annuitant immediately prior to death is shown in Box 34 of a T4RSP. This amount is ordinarily reported on Line 129 of the deceased’s final return. However, part of all of the income may be reported on a beneficiary’s return instead, if a surviving spouse or common-law partner or financially dependent child or grandchild makes an election to have all or part of the amount treated as a refund of premiums. To accomplish this, Form T2019 Death of an RRSP Annuitant–Refund of Premiums must be completed and attached to the return. In this case, the amount is reported on the beneficiary’s return and may be eligible for transfer to the beneficiary’s own RRSP, RRIF, or eligible annuity, as explained later in this chapter.

Contributor Spouse or Common-law Partner If a plan is a spousal or common-law partner plan (that is, the annuitant’s spouse or common-law partner has at one point contributed to the plan), “Yes” is shown in Box 24 and the spouse’s or partner’s SIN is shown in Box 36. If an amount is withdrawn from a spousal or common-law partner plan, and the contributing spouse or common-law partner has, in either the year of the withdrawal or the previous two calendar years, made a contribution to that (or any) spousal or common-law partner plan, the contributing spouse or common-law partner will have to declare as income part or all of the payments made from the spouse’s or partner’s plan that are shown in Box 20, 22, or 26 of the T4RSP.



In this case Form T2205 Amounts from a Spouse or Common-law Partner RRSP or RRIF to Include in Income for ____ must be completed to determine the amount to include in each spouse’s or partner’s income, and a copy of the form must be attached to each spouse’s or partner’s return. The annuitant spouse or common-law partner always claims the tax withheld.



Retiring Allowances Upon retirement, many employers pay their retirees a retiring allowance, which is a lump-sum amount paid in recognition of service to the employer. At one time, retiring allowances were typically paid to those who reached retirement age. However, because of widespread “downsizing,” retiring allowances are now often paid to much younger taxpayers. The definition of retiring allowance has also been expanded to include compensation for loss of office or employment, severance pay, payment for unused sick leave, or early retirement incentives. Regardless of the ages of the employees or the reasons for ceasing employment, retiring allowances are all treated the same way. A retiring allowance is reported to the recipient on a T4A slip in Box 26 and/or Box 27 and must be reported on Line 130 of the recipient’s T1. A retiring allowance is not considered to be pension income, and therefore does not qualify for the pension income amount. Some taxpayers may be allowed to transfer all or part of their retiring allowances to RRSPs or RPPs (see the discussion later in this chapter), thus deferring tax on it. This is a useful strategy, as otherwise a large retiring allowance might put a person in a very high tax bracket, resulting in a large portion being lost to taxes. Any portion of an allowance that is eligible for transfer is reported in Box 26, and the remaining portion (the part that is not eligible for transfer) is reported in Box 27. Tax withheld is reported in Box 22.



Illustration 12.8

David received a retiring allowance when he was laid off from his job, as shown on the T4A below.

David will report $40,000 on Line 130 (the total of Box 26 and Box 27), and claim $1,500 on Line 437. He cannot claim the pension income amount on Line 314.



Transfers to Registered Plans The Income Tax Act allows certain types of income to be transferred into various registered plans, such as RRSPs, RPPs, RRIFs, and DPSPs. Under certain conditions, it also allows funds to be transferred from one registered plan to another (e.g., from one RRSP to another, from an RPP to a RRIF, etc.). Although transfers are not age-dependent (and thus can be made by any qualifying taxpayer) they are discussed in this chapter because many of the situations in which such transfers occur are more frequent among seniors. One of the most common of these is the transfer of eligible retiring allowances to RRSPs. Some types of transfers can only be made directly, i.e., the income must be paid directly to the plan and cannot pass through the taxpayer’s hands. If such income is inadvertently paid to the taxpayer, the eligibility to transfer it to a registered plan (and thus defer tax on it) is lost. Tax is never deducted from amounts transferred directly.



Other types of income can be transferred indirectly, as well as directly. An indirect transfer occurs whenever income is first paid to the taxpayer, and is then put into a registered plan. In this case, tax is always deducted at source (since there is no guarantee the transfer will actually be made). The transferring contribution must be made during the same taxation year the income is received or in the first sixty days of the next year, and must be deducted in the same year the income is reported. When a transfer is made to an RRSP, the usual deduction limits do not apply – transfers are generally limited only by the qualifying income received, and occur separate and apart from the taxpayer’s ordinary RRSP deduction limit. However, the RRSP age limits do apply: a transfer can be made to an RRSP only if the annuitant is under the RRSP age limit. In addition, all RRSP transfers that are included in income must be identified on Schedule 7. Amounts that can be transferred are discussed below (and more details can be found in the CRA’s RRSPs and Other Registered Plans for Retirement tax guide). Note that OAS and CPP benefits can never be transferred.

Direct Transfers

Lump-sum RPP Payments Lump-sum payments from an RPP can be transferred directly to a taxpayer’s RRSP, RRIF, or another RPP. Ordinarily, no information slips or RRSP receipts are issued for direct transfers, and no entries are made on the tax return. However, the Income Tax Act limits how much can be transferred from an RPP without having to include an amount in income. If a taxpayer transfers more than the limit, the excess amount will be shown in Box 18 of a T4A slip and must be reported on Line 130, and an RRSP receipt will be issued for this part of the transfer. Excess RPP lump-sum amounts transferred to an RRSP can be deducted only if a taxpayer has sufficient RRSP deduction room.

Lump-sum DPSP Payments Lump-sum payments from a DPSP can be transferred directly to a taxpayer’s RPP or RRSP. (However, a lump-sum DPSP payment may be transferred indirectly if it includes shares of certain corporations, as explained under “Lump-sum Pension Income” on page 12.20.) No information slip or RRSP receipt should be issued if a lump sum has been directly transferred, and no entries should be made on the income tax return.

Transfers from an Unmatured RRSP A taxpayer may make a direct transfer from one RRSP to another (when he or she wishes to switch plans), or from an RRSP to an RPP or RRIF. In this case, no information slips or RRSP receipts should be issued and no entries should be made on the return.



Transfers on Breakdown of a Relationship A taxpayer may also make a direct transfer to the RRSP or RRIF of a separated spouse or common-law partner if it is made pursuant to a court order or written agreement on the breakdown of the marriage. In this case, the taxpayer who transferred the funds will receive a T4RSP or T4RIF showing the transferred funds in Box 35, and the SIN of the ex-spouse or partner who received the funds in Box 36. These amounts are for information purposes only, and no entries should be made on the return.

Transfer of RRSP Commutation Payments Some RRSP annuity contracts permit the taxpayer to commute the annuity, i.e., to receive a lump-sum payment from the annuity equal to the current value of all or part of the future annuity payments from the plan. In this case, all or any part of the amount may be directly transferred to another RRSP, an RRIF, or an issuer of eligible annuities. RRSP commutation payments should be reported in Box 22 of a T4RSP even though they have been transferred to another plan. No tax should be deducted at source. The carrier to whom the payment has been transferred will issue an official receipt. The receipt may state that the transfer was made under sub-paragraph 60(l)(v) of the Income Tax Act. Taxpayers report commutation payments as income on Line 129. If the transfer has been made to another RRSP, the corresponding deduction is claimed on Line 208, and Schedule 7 must be completed. If the transfer was made to an RRIF, or the issuer of an eligible annuity, the corresponding deduction is claimed on Line 232.

Excess Amounts from a RRIF Excess amounts from a RRIF, as reported in Box 24 of a T4RIF, may be directly transferred to another RRIF, an RRSP, or used to purchase an eligible annuity. The offsetting deduction, if the amount is being transferred to an RRSP, should be claimed on Line 208. If it is being transferred to another RRIF, or is being used to purchase an eligible annuity, it should be claimed on Line 232. In all cases, the deduction must be supported by an official receipt.

Refund of Premiums If an annuitant dies before his or her RRSP matures, and the spouse or common-law partner is the beneficiary of the RRSP, the property in the RRSP may be transferred directly to the surviving spouse’s or common-law partner’s RRSP, RRIF, or used to buy an eligible annuity. Any such rollover is called a refund of premiums and is reported in Box 18 of the spouse’s or partner’s T4RSP. The spouse or partner reports the income on Line 129, and claims a deduction for the transfer on Line 208, if rolled over to an RRSP, or on Line 232, if rolled over to a RRIF or eligible annuity. In certain situations, beneficiaries may elect to have a “deemed receipt on death” treated as a refund of premiums, even though the amount is not transferred directly. This election is discussed in the next section under “Amounts Received on Death of an RRSP Annuitant.”



Indirect Transfers The types of income described below can be transferred to the taxpayer’s RRSP either directly or indirectly; that is, the taxpayer may receive the qualifying income in cash and make an RRSP contribution for part or all of the amount. If transferred indirectly, these types of income have tax deducted at source.

Retiring Allowances The eligible portion of a retiring allowance may be transferred to the taxpayer’s own RRSP directly or indirectly. The amount of a retiring allowance eligible for transfer is limited to $2,000 for each year the retiree was employed up to and including 1995, plus $1,500 for each year of service prior to 1989 for which employer contributions to an RPP or DPSP did not vest in the retiree (i.e., did not become unconditionally payable to the retiree). The years of service after 1995 are excluded from the calculation of the amount eligible for transfer. The eligible portion of the retiring allowance is reported in Box 26 of a T4A slip, and the portion that is not eligible for transfer is reported in Box 27. If the retiring allowance is transferred directly, no tax is deducted at source. The T4A slip or RRSP receipt may also indicate that a transfer was made under paragraph 60(j.1) of the Income Tax Act. The full amount of the retiring allowance (Box 26 plus 27) should be reported on Line 130. The amount transferred to the RRSP should be deducted at Line 208. The amount of the transfer must be shown on Schedule 7.

Amounts Received on Death of an RRSP Annuitant If a surviving spouse or common-law partner is the beneficiary of an RRSP and transfers the funds directly, the amount is reported as a refund of premiums on the spouse’s or partner’s T4RSP, as explained previously. If the spouse or common-law partner is a beneficiary and does not transfer the funds directly, or is a beneficiary of the estate rather than of the RRSP, the amount is reported as a deemed receipt on death on the deceased’s T4RSP. However, the spouse or common-law partner may elect to have all or a portion of the amount treated as a refund of premiums, which allows the amount to be reported on his or her return and to be rolled over tax-free into an RRSP, RRIF, or eligible annuity. To make this election, Form T2019 Death of an RRSP Annuitant–Refund of Premiums should be completed and attached to the return. Similarly, if part or all of the property in the RRSP is payable to a financially dependent child or grandchild, the legal representative of the estate may elect to have all or a portion of the amount treated as a refund of premiums in the hands of the dependant. If the child or grandchild is dependent on the annuitant by reason of physical or mental infirmity, any portion of this amount may be transferred tax-free to the child’s RRSP or RRIF, or may be used to purchase an eligible annuity. Any amount paid to a child or grandchild who is dependent, but not by reason of infirmity, may be transferred tax-free to purchase a term annuity that will spread the payment over a period not extending beyond the child’s eighteenth birthday. To make the election, Form T2019 should be completed and attached to the return.



Any income which is treated as a refund of premiums should be entered on Line 129 of the beneficiary’s return and the transferred amount should be deducted on Line 208 or 232; if the transfer is to an RRSP, the transfer should also be shown on Schedule 7. In either case, an official receipt is required.

Amounts Received on Death of RRIF Annuitant If a surviving spouse or common-law partner is not a successor annuitant or beneficiary of a RRIF, the value of the RRIF is ordinarily included in income on the deceased’s final return. However, if a surviving spouse or common-law partner is a beneficiary of the estate receiving the RRIF property, he or she may elect to have all or a portion of the amount treated as a designated benefit, which allows the amount to be reported on his or her own return, and to be rolled over tax-free into an RRSP, RRIF, or eligible annuity. To make this election, Form T1090 Death of a RRIF Annuitant–Designated Benefit should be completed and attached to the return. Similarly, if all or any part of the property in the RRIF is payable to a financially dependent child or grandchild, the legal representative of the estate may elect to have all or a portion of the amount reported as a designated benefit in the hands of the dependant. If the child or grandchild is dependent on the annuitant by reason of physical or mental infirmity, any portion of this amount may be transferred tax-free to the child’s RRSP or RRIF, or may be used to purchase an eligible annuity. Any amount paid to a child or grandchild who is dependent, but not by reason of infirmity, may be transferred tax-free to purchase a term annuity that will spread the payment over a period not extending beyond the child’s eighteenth birthday. To make the election, Form T1090 should be completed and attached to the return. Any income which is treated as a designated benefit should be entered on Line 115 of the beneficiary’s return and the transferred amount should be deducted on Line 208 or 232; if the transfer is to an RRSP, the transfer should also be shown on Schedule 7. In either case, an official receipt is required.

Lump-sum Pension Income As explained above, most types of lump-sum pension income can only be transferred directly to a taxpayer’s RPP, RRSP, or RRIF. However, exceptions exist for the following types of pension income, which may still be transferred either directly or indirectly to a taxpayer’s RRSP or RPP: Lump-sum amounts from non-registered plans for services rendered by the

taxpayer or the taxpayer’s spouse or common-law partner or former spouse or common-law partner during a period while not a resident in Canada. A transfer is only allowed to the extent that the income in question is not exempt from tax by virtue of a tax treaty.

Amounts reported in Box 22 of a T3 slip. These are eligible pension and DPSP payments from the estate of a deceased plan member.

Certain lump-sum DPSP payments if they are made up in part of the shares of a corporate employer and the taxpayer has elected to include the cost amount of the shares in income. The eligible amount will be identified on Form T2078 as “total cost amount to plan,” and a copy of the form must be filed with the taxpayer’s return.



Certain lump-sum payments received from Individual Retirement Accounts (IRAs)(the U.S. equivalent of RRSPs) to the extent they are derived from amounts contributed by the taxpayer or the taxpayer’s spouse or common-law partner and would be taxable if the taxpayer were resident in the U.S.


Non-Refundable Credits There are a number of non-refundable credits that are of particular significance to seniors. These are described below.

Age Amount Any taxpayer who turns sixty-five on or before December 31 of the taxation year is allowed a federal age amount ($6,408 for 2009). Like the spouse or common-law partner amount, the age amount is linked to income. A taxpayer whose net income is $32,312 or less is entitled to the full credit of $6,408. For individuals with net incomes over this amount, the age amount is reduced at a rate of 15% of net income exceeding $32,312. This means that for a taxpayer with a net income over $75,032, the age amount will be zero. The federal age amount is calculated on Line 301 of the Federal Worksheet and claimed on Schedule 1

Illustration 12.9

Virgil, who is sixty-six, has a net income of $35,000.00. He is entitled to an age amount of $6,004.80, calculated as: Maximum age amount: $6,408.00 Less: Net income $35,000 minus equals 2,688 x 15% =

32,312

Federal age amount Virgil can claim: $6,004.80 403.20


Pension Income Amount A taxpayer in receipt of eligible pension income can claim a federal pension income amount of up to $2,000 on Line 314 of the federal tax return. The federal amount is the lesser of: $2,000; and the total of the pension income which qualifies for the amount.



Company pensions generally qualify for the pension income amount, as do certain other types of pensions. The “Reporting Guide for Retirement Income” lists several common types of retirement payments and, in the last column, indicates whether the payment is eligible for the pension income amount. Note that the following retirement payments received by seniors do not qualify for the pension income amount: Old Age Security pension, Guaranteed Income Supplement, and the Allowance

(formerly called the Spouse’s Allowance); Canada or Québec Pension Plan payments; payments from the Saskatchewan Pension Plan; lump-sum payments or withdrawals from a pension fund, DPSP, or an RRSP; retiring allowances (for example, severance pay); death benefits; pension payments transferred to an RRSP or RPP; foreign pension income exempt from tax in Canada by virtue of a tax treaty and

for which a deduction was claimed at Line 256; payments from an employee benefit plan or trust; payments from a salary deferral arrangement; payments from a retirement compensation arrangement; and income from a U.S. Individual Retirement Account (IRA).

Illustration 12.10

Sylvia retired in November. She received a company pension of $800 and CPP of $300. Her federal pension income amount is limited to $800, since CPP payments do not qualify for the pension income amount.


Amounts Transferred from Your Spouse or Common-law Partner You were introduced to the transfer of amounts from a spouse or common-law partner in Chapter 8 (the disability amount) and Chapter 11 (tuition, education and textbook amounts). In this chapter, you learned about two more amounts that can be transferred: the age amount and pension income amount. To review, taxpayers may transfer to their own returns certain non-refundable credits that their spouses or partners do not need to reduce their own federal income tax to zero. The amounts that qualify for transfer are the: age amount; pension income amount; disability amount; and



tuition, education and textbook amount. amount for children under 18 at the end of the year The age amount transferred from a spouse or common-law partner is based only on the transferring spouse’s or partner’s income, not the income of the person to whom it is being transferred. The federal pension income amount that may be transferred from a spouse or common-law partner is $2,000 or the spouse’s or partner’s total qualifying pension income, whichever is less. Once the qualifying amounts are determined, any amount not needed by one spouse or common-law partner to reduce federal tax to zero may be transferred to the other spouse or common-law partner. The federal transfer is made on the federal Schedule 2.



Illustration 12.11

Dan and his wife Olga are both pensioners. Dan’s net income is $37,000 but does not include any eligible pension income. His age amount is reduced because his income exceeds $32,312. Olga has a net income of only $6,703.52, including $500 that qualifies for the pension income amount. Because Olga’s income is under $32,312, her age amount is not reduced. Therefore the age amount eligible for transfer on the federal Schedule 2 is $6,408. Because Olga has only $500 that is eligible for the pension income amount, this is the maximum she can transfer to Dan. Since Olga does not need any amount to reduce her tax to zero, she can transfer the full amount ($6,908) to Dan. The relevant portion of Dan’s Schedule 2 is shown below.

Note that this transfer is more beneficial than electing to transfer half of her pension income amount because transferring the income would increase Dan’s taxes.


Provincial Credits Please consult your provincial supplement for the value of the provincial non-refundable amounts and their thresholds, as well as any rules that might differ from the federal rules.




Pension Income Splitting Beginning in 2007, taxpayers who receive pension income that is eligible for the pension income amount (referred to as eligible pension income) and have a spouse or common-law partner, may jointly elect with that spouse or common-law partner to have up to 50% of that pension income reported by the spouse or common-law partner. This election is not a transfer of pension benefits like the division of CPP benefits discussed earlier in this chapter, but an election to have the elected pension income treated, for tax purposes, as if it were received by the spouse or common-law partner. Since there is no actual transfer of income to the spouse or common-law partner, the attribution rules do no apply just because the election is made to split pension income.

Eligible Income for Pension Income Splitting Pension income that is eligible for the pension income amount is eligible for the election to split pension income. As outlined in this chapter, eligibility for the pension income amount depends on the source of income, the taxpayer’s age and the circumstances that lead to them receiving that income. The TTS Reference Book; “Eligible Income for Pension Income Splitting” provides a detailed list of pension income types and whether or not they are eligible for splitting.

Making the Election To make the election both spouses or common-law partners must complete Form T1032, Joint Election to Split Pension Income (as shown in Illustrations 12.13 and 12.14) and attach the form to their income tax returns. Taxpayers who file electronically should maintain a copy of the completed forms in case the CRA asks for them. If the taxpayer’s marital status changed during the taxation year, the maximum amount of pension income that may be split is reduced. The maximum amount is determined in Step 2 of Form T1032 by multiplying the eligible pension income by the number of months during which the couple was married or living common law and dividing the result by 12, then multiplying the amount by 50%. If income tax has been deducted from the pension income then the income tax that relates to the elected income is also reported on the transferee’s return. The amount of income tax to be transferred is calculated in Part 5 of Form T1032. The pensioner transferor must include the full amount of the pension income on Line 115 of their return and claim a deduction on Line 210. If the election reduces their eligible pension income to less than $2,000 then the pension income amount claimed on Line 314 must be reduced as well. Only the portion of the income tax that relates to the non-elected income is reported on Line 437.The pension transferee must include the elected pension income on Line 116 of their return. The split pension income may be eligible for the pension income amount and therefore may increase the pension income amount the transferee may claim on Line 314.



The transferee may only claim the pension income amount if: the transferee is 65 or older; the transferee is under 65, but the transferred income is an annuity under a

superannuation or pension plan; or the transferee is under 65, but the income was eligible pension income in the

hands of the pensioner because it was received due to the death of a spouse or common-law partner.

The income tax that is relates to the split pension income is claimed by the transferee on line 437.

Illustration 12.12

Ronald and Marie Perreault are married. Marie is over 65 and receives CPP, OAS and a pension of $28,476 from her former employer. Ronald, who is under 65, continues to work and has no pension income. His employment income on line 101 of his return is $32,000. As their marital status did not change during the year, the Perreaults may elect to have Ronald report up to $14,238 of Marie’s pension income. However, the optimum transfer amount is $8,725. See Illustrations 12.13 and 12.14 for Marie’s form T1032. The Perreaults will report the following amount relating to this pension income on their returns: Line Marie’s Return Ronald’s return 113 $6,203.52 - 114 $8,451.00 - 115 $28,476.00 - 116 - $8,725 210 $8,725 - 314 $2,000.00 $2,000.00



Illustration 12.13



Illustration 12.14



Benefits of Pension Income Splitting The two most obvious benefits of splitting pension income are: the transferee may be able to claim the pension income amount on the

transferred amount. This is a benefit if the transferee does not already have $2,000 or more of eligible pension income.

if the transferor is in a higher tax bracket than the transferee, the splitting of pension income has the potential to reduce the family’s overall tax liability by reducing the amount of income that is taxed at the higher rate.

In addition, the splitting of pension income has the potential to: reduce the amount of the transferor’s OAS clawback as it reduces the

transferor’s net income, and increase the age amount for the transferor because it reduces the transferor’s

net income.

Drawbacks of Pension Income Splitting On the other side of the coin, the election to split pension income can have the following negative effects: If income is transferred from the lower-income spouse to the higher, the overall

tax bill may be increased. The transferee’s OAS clawback may be increased by the transfer as their net

income is increased. The transferee’s age amount may be reduced as their net income is increased. If the transferee’s income is low, the transfer may reduce or eliminate the

spouse or common-law partner amount. Care must be taken in selecting the amount of elected pension income so as to maximize the benefits and minimize the negative effects.

Illustration 12.15

The Perreaults (previous illustrations) elected to transfer only $8,725 of Marie’s pension income to Ronald. This amount brings Ronald’s income to the top end of the lowest income tax bracket and increases Marie’s age amount. Transferring a larger amount would increase Ronald’s federal taxes more than it would reduce Marie’s. Transferring less would result in a lower age amount for Marie.



Net and Total Family Income Effects The election does not affect the family net income. However, the net income of the transferee increases and the family total income increases. These two factors may have an effect on other programs outside of the income tax return, such as the Guaranteed Income Supplement (GIS) and the cost of provincial medical plans or nursing home fees which may be based on the individual’s net income or on total income. When deciding whether or not to split pension income, these other factors should be taken into account as well as the income tax benefits. Service Canada is aware of this issue and has developed Form ISP-3032 to address the negative effect of pension-income splitting. Specific factors for each province are discussed in the provincial supplement component of the course.

2009 General Income Tax and Benefit Guide, pages 14, 21 and 24


Instalment Payments We noted in the introduction to this chapter that it deals with topics likely to be of particular interest to taxpayers sixty-five or older, but that these topics may be of interest to other persons as well. Instalments are a case in point. Taxpayers who are employees pay most of the tax they owe through payroll deductions. However, taxpayers who are retired, have substantial investment income, or are self-employed, may have little or no tax deducted at source and therefore may be liable for instalments. Such individuals must make four payments during the year toward their taxes payable for that year.

Liability Beginning in 2008, taxpayers outside Québec are required to pay tax by instalments if the difference between total tax payable (i.e., federal and provincial tax payable) and amounts withheld at source is greater than $3,000 in both the current year and either of the two preceding years. For 2008 and going forward, taxpayers in Québec are subject to federal instalments if the difference between federal tax payable and federal tax withheld is greater than $1,800 in both the current year and either of the two preceding years.

Instalment Dates Instalments are due on March 15, June 15, September 15, and December 15.

Interest and Penalty on Instalments Interest may be assessed on unpaid, late, or insufficient instalment payments. Interest is calculated at the prescribed rate, which is fixed every quarter. However, no interest is charged if the total calculated interest is $25 or less.



As well as assessing interest, the CRA may assess a penalty on unpaid, late, or insufficient instalment payments. A penalty is charged only if the interest exceeds $1,000. It is calculated as 50% of: the amount of interest payable minus the greater of $1,000; and 25% of the interest that would have been payable if no instalments at all had

been made for the year.

Instalment Amounts Since interest and penalty can be charged for deficient instalments, it is important to know the instalment amount required. Taxpayers are allowed to base their instalment payments on any of the following: their total tax payable for the current year, including OAS repayments, less the

total of amounts withheld at source and certain other refundable credits (“current year method”);

their total tax payable for the previous year, including OAS repayments, less the total of amounts withheld at source and certain other refundable credits (“prior year method”); or

the amount shown on CRA’s Instalment Reminder. The pros and cons of each of these methods are described in the following section.

Current Year Method Calculation of a taxpayer’s instalment payments using the current year method requires an accurate estimate of all the figures that will be needed when the tax return for the current year is completed. This method should not be used unless all the current year income and deductions can be estimated accurately. This is because if the taxpayer’s estimate of income is too low, and results in instalment payments that are insufficient, the taxpayer may be liable for interest on the amount of the shortfall. This method is to the taxpayer’s advantage only if the total tax payable for the current year is less than the total payable for the prior year.

Prior Year Method This method has less uncertainty than the current year method because the prior year income can be more easily established and the instalment liability can be calculated more accurately. However, it is advantageous only if the person’s prior year income is lower than the current year income.



Instalment Reminder Method Fortunately, taxpayers do not need to calculate their instalment payments if they prefer not to. The CRA notifies taxpayers on Instalment Reminders of the required amount of their instalment payments, based on prior year returns. In February, the CRA mails notices of the amounts due on March 15 and June 15. In August they send notices of the amounts due on September 15 and December 15. Since prior year returns are not assessed by February, the amount of the first two instalments is based on the year before that. The third and fourth instalments are based on the prior year return, and include an adjustment so that the total of the four instalments is equal to the prior year’s liability. Taxpayers who pay the amounts indicated on the CRA notices on or before the due dates are not subject to penalties or interest, even if the amount of the instalments later turns out to be deficient. If a taxpayer has to make quarterly instalment payments, the amount of the payments will include the OAS clawback, provincial tax payable and estimated CPP contributions on self-employment income.

Illustration 12.17

Henry’s total tax payable for this year will be $13,000; last year it was $11,000. For each year, the total tax withheld at source was only $1,000. Since the difference between the amount withheld and his total payable exceeds $3,000 for both the current year and last year, Henry is required to make quarterly instalment payments. If Henry uses the current year method, his instalments will be based on his current year taxes ($13,000) less the amount deducted at source ($1,000). Therefore the total amount due by instalments would be $12,000, and he would have to make four payments of $3,000, beginning on March 15. If he uses the prior year method, he would base his instalments on his prior year tax, less the amount deducted at source. This means that the total amount due by instalments would be $10,000, and he would have to make four payments of $2,500, beginning on March 15. He would then have to pay the balance ($2,000) when he files his return. Alternatively, Henry can choose to make no calculations at all and simply pay the instalment amounts shown on the Instalment Reminders he receives from the CRA. Any shortfall would have to be paid when he files his return.

Those wishing to calculate their instalment payments can use the calculation chart in CRA’s publication P110 Paying Your Income Tax by Instalments.



Making Instalment Payments Taxpayers making instalment payments should use the CRA’s Instalment Remittance Form, which is sent to taxpayers with the Instalment Reminder. The amount of the payment should be entered in the indicated box. Payments may be sent directly to the CRA or made at any bank or other financial institution. Alternatively, taxpayers may authorize the CRA to withdraw the payments automatically from their bank accounts on the quarterly due dates. Form T1162A Pre-Authorized Payment Plan (Personal Quarterly Instalment Payments) is provided for this purpose. Taxpayers may either authorize the CRA to withdraw the amount determined under the no-calculation option (as shown in Box 2 of the Instalment Reminder Notice) or stipulate a different amount.

Claiming Instalment Payments Taxpayers who made instalment payments should enter the amount paid on Line 476.



Summary In this chapter you learned about many types of income and credits that are of particular importance to seniors.


Seniors age 65 or over are entitled to receive Old Age Security (OAS) benefits if they have resided in Canada for at least 10 years. Those who have lived in Canada less than 40 years may receive reduced benefits.

OAS benefits are taxable and are reported on Line 113. Taxpayers with incomes over $66,335 are required to repay all or some of their

OAS benefits. Taxpayers may apply for CPP benefits at age 60, if they have substantially

retired, or at age 65, even if they have not retired. Taxpayers who apply before the age of 65 will receive reduced benefits.

Couples may apply to have their CPP benefits split between them, providing they are both at least 60 years of age, and have both applied for CPP benefits.



Taxpayers may be eligible for a number of different types of pension and annuity income. The tax treatment of such benefits depends on whether the recipient is over 65 or, if under 65, whether he or she is receiving the benefit due to the death of a spouse or common-law partner. The “Reporting Guide for Retirement Income” summarizes the tax treatment of the most common types of pension and annuity income.

Foreign pensions are generally taxable in Canada unless they are exempt because of a tax treaty. See the “Effects of Treaties on Foreign Pensions” chart for the status of pensions from selected countries. For countries not listed, the relevant tax treaty (if one exists) must be consulted.

The full amount of foreign pensions must be reported on Line 115. The exempt portion, if there is one, is deducted on Line 256.

U.S. social security pensions are 85% taxable. The full amount is reported on Line 115, and 15% of this amount is deducted on Line 256.

Under certain circumstances, taxpayers may transfer income into a registered plan, or from one registered plan to another, without regard to RRSP limits. Some transfers must be made directly (i.e., without passing through the taxpayer’s hands) and others may be made either directly or indirectly (i.e., the taxpayer receives the money, then contributes it to a registered plan).

Taxpayers age 65 or older are entitled to an age amount. The amount is reduced by 15% of income in excess of the specified threshold.

Taxpayers who receive certain types of pension or annuity income are entitled to a pension income amount equal to the amount of the qualifying income or $2,000, whichever is less.

For reporting purposes only, taxpayers who receive eligible pension income may elect, jointly with their spouse or common-law partner, to split up to 50% of the eligible pension income with their spouse.

Taxpayers may transfer their unused age amount and pension income amount to a spouse or common-law partner.

Taxpayers outside Québec are liable for instalment payments if the difference between tax payable and tax withheld at source is over $3,000 in both the current year and either of the two preceding years. Taxpayers in Québec are subject to federal instalments payments if the difference between federal tax payable and federal tax withheld at source is over $1,800 in both the current year and either of the two preceding years.

Taxpayers may calculate their own instalments using either the current-year or prior-year method, or they may simply pay the instalment amounts calculated by the CRA.

Deficient instalments are subject to interest. If the interest exceeds $1,000, a penalty may also be assessed.



Chapter 13 – Administration

Introduction Congratulations! You have reached the end of the core segment of H&R Block’s introductory tax course. This means that you are able to complete most basic individual income tax returns. This concluding chapter presents a discussion of some of the administrative elements of tax return preparation.

At the conclusion of this chapter you will be able to:

Submit returns and payments to the CRA; Explain the process of what happens to a tax return after it is filed; Amend a return using Form T1-ADJ; Explain the rules for interest and penalties related to the filing of a return; Summarize the general procedure for assessments, objections, and appeals; and Explain time limits for refunds and elections.

Glossary Before you read this chapter, review the following term in the glossary: Notice of Assessment.



Submitting the Return When filing a paper return, all schedules, forms, information slips, and other required documents should be attached to the top of page 3 of the return. When a return is submitted electronically, by EFILE through a service provider, or NETFILE using the CRA’s transmission website, the required paper documentation is not sent to the CRA, but must be kept on hand in case of a request for review. If a taxpayer is filing a paper return with a balance due, the cheque may be sent in with the return. If so, it should be attached to the top of page 1. If a balance-due return is sent in without a remittance attached, the amount owing will be stated on the Notice of Assessment and, if paid before April 30, no interest will be charged. However, if the return is filed near the deadline, the return may be assessed after April 30, in which case interest will be charged if the return was sent in without the remittance attached. If a taxpayer is filing a balance-due return electronically, the amount owing may be paid at any financial institution or by accessing “My Payment” service online using CRA’s website. If the amount is paid by April 30, no interest will be charged.

What Happens after Filing? Taxpayers often wonder what happens to their tax returns once they have been sent to the CRA. This section of the chapter (derived from information provided by the CRA), describes the procedures used by the tax department. It is provided both to satisfy your curiosity and to help you understand how to avoid delays in the processing of the returns you prepare.

Processing the Return When a return is sent to the CRA, it joins the returns of more than twenty million other Canadian taxpayers. Depending on where the taxpayer lives, the return will be processed at the taxation centre in St. John’s, Summerside, Shawinigan-Sud, Jonquière, Ottawa, Sudbury, Winnipeg, or Surrey. These taxation centres are at their busiest between March and June. A large number of returns from taxpayers expecting refunds are received in mid-March, but approximately one-half of all returns arrive near the April 30 deadline. Once a paper tax return has arrived at the taxation centre, it is processed as follows (electronic returns enter at Step 5): 1. The attachments (schedules, information slips, receipts, etc.) are checked. 2. If a return does not have a remittance, it is sent directly to the initial assessing

section. If a return contains a remittance, it is sent to the cash section. The amount of the cheque is credited to the taxpayer’s account, and then the return is sent to the initial assessing section.

306 Chapter 13 - Administration


3. At initial assessing, assessors examine the return to ensure it is properly completed for computer processing. They check for the necessary information slips and receipts and verify that the amounts they show correspond with the amounts on the return. If any information is missing or unclear, or any receipts are missing, the return is sent to the correspondence section. Every year about 500,000 returns are delayed at this stage. This section notifies the taxpayer, usually in writing, of the need for additional data. Meanwhile, the return waits. If the taxpayer does not reply to the request for information within thirty days, the return may be adjusted and processed without the additional information.

4. When the return is ready for processing, it is assigned a number allowing it to be traced by computer if it needs to be found at some later date. Returns subsequently remain in numerical order.

5. The information on manually prepared paper returns is keyed into the CRA’s computer. For computer-generated returns, a 2-D bar code is printed on page 1 of the T1 which contains all of the individual identification and financial data necessary for the assessment of the return. The bar code is scanned using a laser beam scanner. Electronically filed returns join the stream at this point; the electronic transmission sends the information on the returns directly into the CRA’s computer. The computer checks the identification of each taxpayer and verifies the calculations, passing on the correct returns and alerting the operator to those with errors. The computer also produces information on tape for the printing of assessment notices, explanations of errors, and refunds. It also updates each person’s individual records with the latest information. Many errors can be detected by the computer, and explanations of the changes will be included on the assessment notices. If a paper return happens to be one of the few that cannot be fully corrected at the data processing stage, it will be forwarded to another section for examination and correction. Electronically filed returns that do not pass certain checks at the time of transmission (and this is less than 10%) are simply not accepted by the CRA’s computer; the transmitter is obligated to correct any errors and either retransmit the return, or file it on paper.

6. Each paper return is given a label that indicates its processing at the taxation centre is complete, and it is filed away.

7. Assessment notices are printed and sent to taxpayers who do not receive refunds. Computer tapes indicating refunds are forwarded to the Department of Supply and Services. Assessment notices are issued and mailed from there, and refunds are either mailed or deposited directly into a taxpayer’s bank account. At least one month usually passes between the time a completed paper tax return is received and the time a refund is sent. If the return is complicated, if it contains errors and/or omissions, or if it is among the multitude of tax returns that arrives around the end of April, the process may take more time. On the other hand, the CRA states that an electronically filed return accepted by them is usually processed in less than two weeks.



Ways to overcome the most common processing problems are: Use the personalized labels supplied by the CRA.

Taxpayers who use an EFILE service will not receive a personalized label the following year. Taxpayers who file a paper return should attach the label to their return.

Make sure the SIN, name, and date of birth are correct. A missing or incorrect SIN will prevent the return from being processed because the CRA uses this number to store and access the taxpayer records. An incorrect date of birth may cause problems because of deductions and credits that depend on a taxpayer’s age.

In the case of a paper return, ensure that all required attachments and receipts are present, and that all required information is provided. This will avoid the delay that is caused when the CRA has to send a letter requesting additional information.

In the case of a paper return, ensure the legibility of all figures so that a return is not pulled from processing for correction simply because the numbers were not clearly written and therefore were entered incorrectly into the computer.


Amending a Return Taxpayers who discover an error or omission in their returns after filing should never file a new return. Instead, they should prepare a written request for adjustment and attach to it the applicable receipts, information slips, or other documents. The CRA’s Form T1-ADJ, shown in Illustration 13.1 may be used to request an adjustment to a return. The T1-ADJ, along with the required documentation, should be mailed to the same taxation centre as the original return. The same procedure applies, whether the tax return was filed on paper or electronically, and regardless of whether or not the taxpayer has received a Notice of Assessment for the return. Individual tax filers may also request changes to their returns for the current year or the prior two taxation years on CRA’s web site. Commercial tax preparers may (with the client’s authorization) request changes to their clients returns on line. When a trustee in bankruptcy files a request for adjustment for a year prior to the bankruptcy, any refunds relating that request will be sent to the trustee and distributed amongst the taxpayer’s creditors.

Form T1-ADJ Area A of Form T1-ADJ T1 Adjustment Request contains the information that the CRA needs to identify the taxpayer and to determine which year’s tax return is to be adjusted.



It is important that all the information be provided. If the taxpayer has given a tax preparation firm written authorization to represent him or her to the CRA, the appropriate information should be provided in Area B. Area C of the form asks for details of the requested changes, and for the numbers and names of the lines that are to be changed. In this section you should list only the income, deduction, or credit lines that will be changed. The resulting changes to lines showing net or taxable incomes, tax calculations, or the refund or balance owing do not need to be shown; these amounts will be changed by the CRA. For each line that is affected, indicate in the appropriate column: the original amount entered on the return, or (if applicable) shown on the latest

Notice of Assessment; whether the amount will be increased (+) or decreased (–) by the adjustment; the amount of the adjustment; and the revised amount. The lower part of Area C is for additional details and explanations. These should indicate clearly and concisely what you want the CRA to do. There is no need to make excuses or apologize for the error or omission, or to offer an explanation for it. For example: If the adjustment is being requested because the taxpayer received another T4

after the return was filed, the message, “See additional T4 attached” is sufficient. There is no need to explain that the T4 was received late because it was sent to the taxpayer’s old address, and that the former employer had to be contacted to provide the taxpayer with another copy, etc.

If the adjustment is being requested because the CRA made a mistake in assessing and disallowed a legitimate deduction, the message should state, “Please allow deduction for . . . as claimed on the return as filed.”

If the adjustment involves a required schedule, form, or receipt that was not completed or submitted when the original return was filed, the documentation should be attached to the T1-ADJ. If the adjustment involves a schedule or required form that was originally filed with the return, attach a revised copy of the schedule or form which is clearly marked “amended.” The T1-ADJ must be signed and dated in Area D. See Illustration 13.1 for an example of a completed T1-ADJ.





Illustration 13.1

Raquel Marx is a widow. She has two young children. When she prepared her return, she did not know that she could claim an eligible dependant amount for one of the children. Her request for adjustment is shown below. A completed Schedule 5 should be attached to her T1-ADJ.



Assessment, Objections, and Appeals At the time of filing, the CRA reviews each return and may assess it as filed, or request more information, or make changes that increase or reduce the tax liability. The taxpayer will receive, in due course, a Notice of Assessment showing the results of the review. For the great majority of taxpayers, once a notice is issued, the matter of that particular year’s taxes is settled. However, the government has the right to reassess at any time within three years after issuing the first notice. If a taxpayer disagrees with an assessment, he or she can file a Notice of Objection which provides the opportunity for further discussion with the CRA. The Notice of Objection can be filed up to the later of: ninety days from the mailing of the Notice of Assessment and one year from the due date of the return. If no agreement is reached, the taxpayer may then appeal to the Tax Court of Canada or the Federal Court. Either the taxpayer or the Minister of National Revenue may appeal an adverse decision to higher courts, even to the Supreme Court of Canada.

Interest and Penalties The CRA will pay interest on unpaid refunds beginning on the latest of: the thirty-first day after the return is due; the thirty-first day after the tax return is filed; or in the case of an erroneous overpayment of tax, the date on which the tax was

overpaid. The CRA will charge interest on unpaid balances beginning on April 30 (even for taxpayers whose due date is June 15 because they, or their spouses or common-law partners, are self-employed). Individuals who have tax owing are subject to a late-filing penalty if they file their returns after the due date (April 30 for most taxpayers, and June 15 for those who are self-employed or whose spouses or common-law partners are self-employed). The penalty is equal to 5% of the tax payable, plus 1% of the tax payable for each month that the return is late, to a maximum of 12 months. In addition, if a late-filing penalty was charged in the previous three years, it can increase to 10% of the balance owing, plus 2% of the tax payable for each month the return is late for up to 20 months. The late-filing penalty is levied in addition to any interest that is owing on the unpaid tax. There is an additional penalty for any amounts not reported on the 2009 return if those same amounts were not reported on the 2006, 2007, or 2008 return. However, under the “taxpayer relief provisions”, the CRA may waive or cancel penalties and interest in the following circumstances: the taxpayer was prevented from filing or responding on time by an

extraordinary circumstance such as serious illness, death, disaster, etc.;



the taxpayer was prevented from filing or responding due to a disruption in services (such as a postal strike);

the interest or penalty resulted from relying on incorrect written responses from the CRA, or errors in their publications; or

the interest or penalty was due to the CRA’s error. Since both interest and late-filing penalties are calculated as a percentage of tax owing, no penalty is levied against late-filed returns that are eligible for refunds.


Refunds At one time, tax returns with refunds had to be filed within three years or the refund was lost. However, under the “taxpayer relief provisions”, the CRA may now pay refunds for returns that are filed within ten years of the end of the taxation year. This means that a taxpayer may, in 2010, file a return to request a refund (or submit a request for adjustment that results in a refund) for any year back to 2000. The intent is to allow a taxpayer to claim refunds due to previously overpaid taxes deducted at source, unclaimed deductions, and non-refundable tax credits that were missed on a previously filed return, or refundable federal credits (not including overpayments of CPP contributions and/or employment insurance premiums) that were omitted from the original return. Receipts for all deductions and credits claimed must be attached to any late-filed return or request for adjustment, even if they are not ordinarily required. The original fairness legislation also envisioned allowing a taxpayer to claim refundable provincial credits that were omitted from the original return, but in fact such credits cannot be claimed unless the province in question passes parallel legislation. So far, only Ontario and Québec have passed such legislation. Therefore, claims for provincial tax credits offered by other provinces must still be made within three years of the end of the taxation year in question. In summary, the time limit is ten years on most refunds except for the following: overpayments of CPP contributions, which must be claimed within four years;

and overpayments of employment insurance premiums or refundable provincial tax

credits, which must be claimed within three years (except for Ontario and Québec provincial tax credits).

Elections In many instances, the Income Tax Act allows taxpayers to decide how the tax law should apply to their financial affairs. There are, in fact, over 120 of these “elections” in the Act. One you have studied in this course applies to investments acquired prior to 1990: for such investments, a taxpayer can choose to report accrued interest using the annual method instead of the compulsory three-year method.



Under the “taxpayer relief provisions,” taxpayers are allowed to make a number of elections after the time limit, and to amend or revoke certain previously made elections. However, it is wise to proceed cautiously, since late elections are often subject to penalties. If the penalties exceed the tax advantage afforded by making the election, a taxpayer is better off not making the election, even if allowed to do so.


Summary In this chapter you learned about some of the administrative aspects of filing a return.


Returns can be submitted electronically or on paper. Remittances may be attached to the front page of paper-filed returns.

Remittances for electronically filed returns may be paid at any financial institution or on “My Account” at CRA’s website.

After filing, returns are processed by the CRA. Taxpayers can prevent processing delays by using their personalized labels, and making sure their name, SIN and date of birth are correctly entered on the return.

If a mistake is discovered after a return is filed, it should be corrected by filing Form T1-ADJ T1 Adjustment Request, not by filing another return.

After a return is processed a Notice of Assessment is sent to the taxpayer. Taxpayers can object to the assessment by filing a Notice of Objection within one year from the due date of the return, or 90 days from the issuance of the Notice of Assessment, whichever is later.

If the Notice of Objection does not result in a favourable assessment, taxpayers can appeal to the court.

Taxpayers can claim refunds going back ten years except for overpayments of CPP contributions, which must be claimed within four years; and overpayments of employment insurance premiums and refundable provincial tax credits for any province except Ontario and Québec, which must be claimed within three years.

Taxpayers can make certain elections after the time limit. However, care must be exercised, as penalties can make the election disadvantageous.



Glossary



Accrual method - A method of recognizing income and expenses for tax purposes as they are earned and incurred, rather than as they are received and paid. Annual accrual method - The required method of reporting interest earned on investments acquired after 1989. This method may also be used for pre-1990 investments. Annuitant - The person to whom a retirement plan provides income. Annuity - A series of regular payments (usually equal) received by an individual (called the annuitant), consisting of principal and interest, from funds invested at some time previously. An annuity may be for a fixed term or for life. Attribution rules - Tax rules that ensure that income generated from property transferred by a taxpayer to his or her spouse or minor child will be reallocated for tax purposes to the person who made the transfer. Balance owing - The amount by which a taxpayer’s total tax payable (Line 435) exceeds his or her total refundable tax credits (Line 482). Bonds - Certificates issued by companies or governments showing that they have borrowed money from the bondholder and will pay it back by a certain date, and stating how much interest will be paid for the use of the money. Canada Education Savings Grant (CESG) - A matching government grant based on annual RESP contributions on behalf of beneficiaries under the age of 18 who are resident in Canada. Canada Employment Amount - A federal non-refundable credit available to those who report income from employment. Canada Learning Bond (CLB) - Human Resources and Social Development Canada (HRSDC) helps modest income families save for a child’s post-secondary education. The CLB amount is deposited directly into the child’s RESP account. Canada Pension Plan - A program designed to provide income for retirement. It also provides income to those who become disabled. The vast majority of working individuals, aged eighteen to seventy, must contribute to the plan. Canadian securities - Shares, bonds, or other instruments issued by Canadian governments or corporations. Capital gain - The profit realized when capital properties such as shares and real estate are sold for proceeds greater than their cost plus any outlays and expenses related to the sale. Capital loss - The loss that results when capital properties are sold for proceeds less than their cost plus the expenses related to the sale. Capital losses are first applied against any current capital gains. Any capital loss remaining may not be deducted from other income, but may be applied against capital gains from other years, subject to certain rules and restrictions.

316 Index


Capital property - Anything of value other than the trading assets of a business. Carrying charges - Expenses related to the earning of investment income. Carryover - Tax law provisions that allow certain losses, deductions, or credits to be used in a tax year other than the tax year incurred. A carryforward is to a future year. A carryback is to a prior year. Cash method - A method of recognizing income or expenses in the year they are actually received or paid. Credit - A deduction from tax, rather than from income. Death benefit - A payment made on or after the death of an officer or employee in recognition of his or her service (not to be confused with a death benefit received under the Canada Pension Plan or Québec Pension Plan). Subject to certain deductions, such an amount must be included in income by the recipient. Deduction - For tax purposes, an amount subtracted from income. Deferred profit sharing plan (DPSP) - An employer-sponsored benefit program under which contributions are set aside out of profits to provide employees with an annuity after retirement. Dividend - A distribution which a corporation pays to its shareholders out of its after-tax earnings or profits. Dividend gross-up - The increase in the actual amount of a dividend from a taxable Canadian corporation that is added to the actual amount to arrive at the taxable amount. The dividend gross-up is 45% for eligible dividends from taxable Canadian corporations and 25% for other than eligible dividends from taxable Canadian corporations. Dividend tax credit - A tax credit which is allowed for individuals who receive dividends from a taxable Canadian corporation. The dividend gross-up and tax credit are part of an arrangement by which a shareholder is taxed on dividend income, but allowed a tax credit to compensate for the fact that the profits from which the dividends were paid were already taxed in the corporation. Earned income for RRSP purposes - The income used to calculate a person’s RRSP deduction room. Educational Assistance Payments (EAP) - An EAP is the amount paid to a student from an RESP to finance the cost of post-secondary education. The EAP is included as income on his or her return in the year of receipt, the amount is reported in box 42 of the T4A slip.



Eligible Dividend. Dividends issues to shareholders by Canadian corporations that are not eligible for the small business deduction. Most public corporations issue eligible dividends whereas dividends from most private corporations are not eligible dividends. Home Buyers’ Plan - A plan that allows qualifying taxpayers to withdraw up to $20,000 ($25,000 after January 27, 2009) from their RRSPs on a tax-free basis in order to purchase a home. The amount must be repaid to the taxpayer’s RRSP over a period of 15 years. Income-averaging annuity contract (IAAC) - A special type of annuity (permitted prior to 1982) designed to average certain unusual amounts of income a taxpayer received in the year. The averaging was accomplished by deducting the premium paid to purchase the IAAC in the year paid and then including the annuity payments (which had to be equal) in income in the years received. Indexing - The annual increasing of the personal amounts and tax brackets to reflect the annual inflation rate, as measured by the Consumer Price Index. Investment tax credit - A tax credit available for the purchase of certain new buildings, machinery, or equipment. The assets acquired must be used in certain areas of Canada and in certain industries, such as manufacturing, farming, fishing, and logging. Lifelong Learning Plan - A plan that allows qualifying taxpayers to withdraw funds from their RRSPs on a tax-free basis in order to finance their own education or that of their spouses or common-law partners. Up to $20,000 can be withdrawn over a four-year period, with a limit of $10,000 in any calendar year. The money must later be repaid over a period of 10 years. Marginal rate of tax - The combined federal and provincial tax rate that applies to the last dollar earned. Matured RRSP - An RRSP that has begun paying retirement income or that is owned by an annuitant after the end of the year in which he or she turned 71. Mutual fund trust. A trust set up to pool money from many investors and used to create a diversified portfolio of investments in accord with the fund’s prospectus. The portfolio is managed by professionals, usually for a pre-set fee, and any income earned by the fund, after subtraction of expenses, flows through to the investors. Net income - On the T1 return, the gross income from all sources less certain specified deductions. Non-refundable tax credits - Credits which are used to reduce tax, but which are not refundable if the credits exceed the tax owing. Notice of Assessment - Official notification of a taxpayer’s liability that is issued by the CRA after a tax return has been reviewed.

318 Index


Old Age Security - A benefit available to any Canadian resident, aged 65 or over, who has resided in Canada for at least ten years. It is paid by the federal government out of tax revenues and is administered by Human Resources and Social Development Canada. Past service pension adjustment (PSPA) - A measure of the value of upgrades or additional years of service credited to a taxpayer on a past-service basis under a defined benefit RPP. A PSPA is calculated only if past service benefits are provided for service performed in 1990 or later years. Pension adjustment (PA) - A measure of the value of the benefits earned for the year under a DPSP or under a benefit provision of an RPP. A PA in respect of one year limits the RRSP contribution that can be made for the following year. Pension adjustment reversal (PAR) - A measure of the value of RPP or DPSP benefits lost when an employee leaves a job before retirement. The PAR increases RRSP deduction room in the year to which it applies. Pension income amount - The federal non-refundable credit that may be claimed for the first $2,000 of qualifying pension income (not including Canada/Québec Pension Plan benefits or Old Age Security benefits). The pension income amount is claimed on Line 314 on Schedule 1. The provincial pension income amount may vary by province. Pension Income Splitting - An election where spouses or common-law partners may elect to report up to 50% of one spouse’s eligible pension income on the other spouse’s return. Personal amounts - Specified amounts that are included in the calculation of non-refundable tax credits as allowances for the taxpayer and persons dependent on him or her for support. Refund - The amount by which a taxpayer’s total refundable tax credits (Line 482) exceeds his or her total tax payable (Line 435). Refundable tax credits - Those credits which reduce a taxpayer’s total tax payable and which are refunded to the taxpayer if they exceed the tax owing. Registered education savings plan - A contract entered into between a subscriber and a “promoter” under which, in consideration for amounts paid under the contract by the subscriber, the promoter agrees to make educational assistance payments to a designated beneficiary to further the latter’s education at the post-secondary school level. Registered pension plan (RPP) - A superannuation or pension fund or plan that is accepted by the CRA for registration. Contributions to a registered pension plan are tax-deductible.



Registered retirement income fund (RRIF) - A plan registered with the CRA that is established to provide an individual with retirement income. RRIF funds typically arise from transfers from other registered funds, e.g., RRSPs. Registered retirement savings plan (RRSP) - A plan registered with the CRA that allows individuals to save for retirement by making tax-deductible contributions. Research grant - A sum of money provided to a recipient to carry out a research project. Retiring allowance - A payment received by an employee from a former employer in recognition of long service or for loss of employment. Rollover - A tax-free transfer. Stock dividend - A dividend payable in shares of the corporation paying the dividend. Stock option - An agreement which allows shares of a corporation to be purchased for an agreed price at some future date. Superannuation - Pension. Taxable income - The income left after making certain deductions from net income. The tax payable is based on this amount. Taxation year - For individuals, the calendar year. Tax bracket - The income levels to which different rates of tax are applied. Tax-Free Savings Account (TFSA) - Beginning January 1, 2009, a tax-free savings account allows individuals to contribute $5,000 (plus indexation after 2009) to an account in which the income earned is tax free, even when withdrawn. Contributions to the account are not deductible for tax purposes and interest on money borrowed to contribute is also not deductible. Triennial accrual - A method of reporting accrued interest every three years on qualifying pre-1990 investments. Trust - An arrangement made in a person’s lifetime or effective upon death whereby legal title and control of property are placed in the hands of a custodian (trustee) for the benefit of another person or persons. Trustee - A person who acts as a custodian and administrator of property held in trust for someone else.

320 Index


Universal Child Care Benefit - A $100 per month benefit paid to the parents of each child under the age of six. There is no means test for the UCCB. The UCCB received must be reported on the return of the lower-income spouse or common-law partner. Repayments of UCCB amounts received in a prior year may be deducted in the year repaid. Unmatured RRSP - An RRSP that has not yet begun to pay retirement benefits, and whose owner was under 71 at the beginning of the year. Wage-loss replacement plan. An arrangement that provides for benefits to be paid on a periodic basis when an employee is unable to work due to sickness, maternity, or accident. Working Income Tax Benefit. A refundable credit, first available in 2008 (based on income reported on the 2007 income tax return), that is a refundable tax credit to help modest income taxpayers.



Index



A Achievement prizes ....................... 249 Adjusting a return ........................ 307 Adoption expenses .......................... 223 Adult basic education assistance .... 264 Administration ............................... 305

Amending a return .................. 307 Appeals .................................... 310 Assessments ............................. 310 Elections .................................... 311 Electronic filing ......................... 18 Interest on late payments ........ 310 Objections ................................ 310 Refunds ...................................... 311 Records and receipts ................. 21 Submitting a return .................. 305

Age amount ................................... 289 Allowances and benefits

Non-taxable ............................... 33 Taxable ...................................... 32 Training ................................... 250

Amending a return ........................ 307 Amount for children under 18 ......................... 80, 241 Amount for eligible

dependant ............................ 75, 239 Amount for infirm dependants age 18 or older ............. 81, 242 Amount for Public Transit Passes .... 84 Amount transferred from spouse or partner ............ 173, 263, 290

In year of separation ................ 242 Annuities

DPSP ....................................... 275 Income-averaging (IAAC) ....... 279 RPP .......................................... 274 RRSP ....................................... 280 Unregistered ............................ 278

Appeals .......................................... 310 Apprenticeship completion grant ... 197 Apprenticeship incentive grant ...... 197 Assessments .................................. 310 Attendant care expenses ............. 184, 191, 234 Attribution rules ........................... 124

B Baby-sitting ..................................... 36 Bar code ........................................... 306 Basic personal amount ................... 74 Benefits Non-taxable ............................... 33 Taxable ...................................... 32 Bonds, Canada Savings .................. 119 Bursaries ....................................... 249

C CPP Benefits ................................... 135

Child benefit ............................. 135 Death benefit ............................. 136 Division of .................................. 272 Disability benefit ....................... 135 Lump-sum benefits ................... 136 Retirement benefit ........... 135, 271 Splitting ..................................... 272 Survivor benefit ........................ 135

CPP Contributions .......................... 58 Employer withholding ............... 59 Overpayments of ................ 60, 104 Proration of................................. 62 Underpayments of ...................... 60

Canada Employment Amount .......... 66 Canada Learning Bond ................... 252 Canada Savings Bonds .................. 119

As RRSP investment ............... 205 Canadian Forces personnel and police deduction ........................... 55 Capital gains ................................. 122 Capital property ............................ 122 Carrying charges ............................ 127 Casual employment ........................ 36 Charitable donations ..................... 140

Artists ...................................... 142 Calculation of credit ................. 144 Carryforward ............................ 141 Cultural property ...................... 142 Income limitation .................... 140 Property, gifts of ...................... 142 Qualifying ................................ 141 Religious orders ....................... 143

Child amount ............................ 80, 241 Child, definition of ........................... 71

324 Index


Child care expenses ...................... 225 Calculation of deduction ......... 227 Child Tax Benefit ...................... 234 Disability supplement .............. 234 Earned income ........................ 229 Eligible child ........................... 225

Eligible claimants ........................... 227 Eligible payments ..................... 225 Marital status change.............. 235 Purpose of ................................. 225 Receipts ................................... 234 Separation in the year ............. 235 Supporting person .................. 227 Timing of payments ................ 226 Universal Child Care Benefit ... 234

Child support, non-taxable ............. 218 Child Tax Benefit ............................ 91

Benefit Amount ........................... 92 Child care expenses .................. 234 Family income ............................. 92 Marital change ........................ 243 Qualifying children ................... 92

“Clawback,” social benefits .. 139, 270 Commission income ........................ 32 Common-law partner ..................... 71 Commutation payments ............... 282

D Death benefit, CPP ....................... 136 Death benefit, other ...................... 147 Deferred profit sharing plans ....... 275 Dependants ..................................... 70

Support of.................................... 70 Dietary disorders ............................ 158 Direct deposit request .................. 105 Disability amount .......................... 157

Cumulative Effects of Significant Restrictions ...... 158

Dietary Disorders ..................... 158 Life-Sustaining Therapy........... 158 Transferred from a dependant . 171

Disability supports deduction ........ 186 Disability transfers ................ 171, 173 Disability, defined .......................... 157 Dividends ...................................... 111 Dividend tax credit ....................... 111 Due dates for returns ..................... 13 Dues, union or professional ............ 46

E Earned income

For child care expenses .......... 229 For RRSP purposes ................... 198

Education and textbook amounts .. 258 Carryforward ........................... 260 Transfers .......................... 260, 263

Educational assistance payments .. 250 EFILE ............................................... 19 Elections Canada .............................. 24 Electronic filing .............................. 18 Eligible dependant amount ...... 75, 239 Eligible dividends ........................... 111 Emergency volunteers ...................... 34 Employee and partner GST/HST

Rebate ....................................... 104 Employee home relocation loan deduction ..................................... 55 Employees’ profit sharing plans

Payments from ................... 40, 113 Employment expenses .................... 54 Employment income ........................ 31

Commissions ............................. 32 Definition .................................. 31 Non-taxable allowances ............. 33 Repayment of ............................ 54 Taxable allowances .................... 32

Employment insurance .................. 137 Benefits repaid ........................ 138 Clawback ................................. 139 Employer withholding .............. 64 Overpayments ................... 64, 104 Premiums .................................. 64

Excess amounts, RRIF .......... 227, 286 Excess RRSP contributions .......... 202 Expenses, employment ................... 54

F Federal political contributions ....... 101 Federal tax .................................. 15, 99 Fellowships ................................... 249 Filing requirements ........................ 12 First-time home-buyer’s amount ... 210 Foreign investment income .......... 121 Foreign pensions ........................... 275 Foreign property ............................... 25 Form T1-ADJ .......................... 307, 309 Funeral expenses .......................... 183



G Gambling winnings ........................... 14 Gasoline excise tax rebate .............. 193 Gifts received .................................... 14 GST/HST Credit ................................ 87

Applying for ............................... 88 Calculation of ............................. 88 Eligibility for .............................. 88

Eligible dependant ............................ 89 Eligible children .......................... 89 Marital change ......................... 242

GST/HST Rebate ............................. 104 Gratuities ......................................... 36 Guaranteed Income Supplement .. 269

H Home Buyers’ Plan ......................... 205

Contributions prior to ............... 207 Repayments ............................. 209 Withdrawals ............................ 205

Home relocation loan ........................ 55

I Identification ..................................... 21 Income-averaging annuity contracts (IAACs) ...................... 279 Income

Achievement prizes ................. 249 Annuities ......... 274, 275, 278, 280 Bursaries ................................. 249 CPP benefits ..................... 135, 271 Commissions ............................. 32 Child support ............................ 218 Death benefits ................. 136, 147 Dividends ................................... 111 DPSP payments ....................... 275 Earned, defined ................ 198, 229 Employee profit sharing..... 40, 113 Employment ............................... 31 EI benefits ............................... 137 Excluded ...................................... 14 Fellowships .............................. 249 Gratuities .................................. 36 Interest ..................................... 117 Investment income ................... 117 Jury duty ................................. 147 Net income ................................. 15 Odd jobs ..................................... 36 Old Age Security ..................... 269 Pensions.................................... 273

RCA............................................ 279 RESP payments ....................... 250 RPP payment ............................ 274 Repayment of employment ....... 54 Research grants ......................... 38 Retirement compensation

arrangements .................... 279 Retiring allowances ....................... 283

Royalties .............................. 40, 118 RRIF payments ....................... 276 RRSP payments ...................... 280 Scholarships ............................ 249 Social assistance ..................... 134 Supplementary unemployment benefit plan payments ......... 40 Support payments ..................... 218 Taxable income .......................... 15 Theft or embezzlement ............ 147 Tips ............................................. 36 Training allowances ................ 250 Wage loss replacement plans .... 37 Workers’ compensation ........... 133

Individual Retirement Account ...... 289 Infirm dependants, amount for ........ 81 Inheritances ...................................... 14 Instalment payments ...................... 298

Current year method ............... 299 Due dates ................................. 298 Instalment Reminders ............ 300 Interest and penalty ................. 298 Liability for .............................. 298 Making payments .................... 301 Prior year method ................... 299

Interest and investment income ..... 117 Bank deposits .......................... 117 Bonds ....................................... 119 Canada Savings Bonds ............. 119 Child Tax Benefit payments ... 126 Dividends ................................. 111 Foreign source ......................... 121 Interest .................................... 117 Long-term investments ............. 118 Mortgages ................................ 118 Pre-1990 investments ............... 118 Property transferred ................ 125 Royalties .................................. 118 Treasury bills .......................... 120 Universal Child Care Benefits .. 126

Interest expenses .................. 127, 253 Interest on unpaid taxes ............... 310

326 Index


IRA ............................................. 289

J Jury duty, income from ................ 147

L Labour-sponsored funds ................ 102 Legal expenses ...................... 145, 223 Late filed returns ........................... 311 Lifelong Learning Plan ................... 211 Life-sustaining therapy .................. 158 Lottery winnings .............................. 14 Lump-sum payments

CPP disability benefits ........... 136 DPSP ........................................ 275 Other transfers ....................... 289 Pension income ......................... 288 RPP ........................................... 274 RPP and DPSP transfers ........ 285 Support ..................................... 219

M Marriage in the year ...................... 217

Child care deduction ................ 235 Canada Child Tax Benefit ....... 243 Eligible dependant amount ...... 239 GST/HST credit ....................... 242 Spouse or common-law partner amount ............ 74, 237

Medical expenses ............................ 179 Claiming .................................... 184 Qualifying expenses .................. 180 Non-qualifying expenses .......... 183 Other dependants ..................... 179 Refundable supplement ............ 189

Methods of reporting interest Annual accrual ......................... 119 Triennial accrual ..................... 119

Moving expenses ............................... 46 Deductible expenses ................... 48 Distance requirement ................ 47 Net earnings limit ..................... 47 Purpose of move .......................... 47 Students ................................... 264

Mutual funds ................................. 123

N NETFILE .......................................... 19 Non-refundable tax credits ............. 87

Age amount ............................. 289 Basic personal amount ............. 74 Caregiver amount ....................... 83 Children’s fitness amount .......... 86 Charitable donations .............. 140 CPP contributions ..................... 58 Disability amount .................... 157 Disability transfers ........... 171, 173 Education amount .................. 258 Education transfers .................. 260 Eligible dependant ............. 75, 239 EI premiums ............................. 64 Infirm dependants ..................... 81 Medical expenses .................... 179 Pension income amount .......... 289 Public transit passes .................. 84 Spouse or common-law partner amount ........... 74, 237 Tuition fees ............................. 254 Tuition fee transfers ............... 260

Non-taxable allowances and benefits ................................ 33 Non-taxable income ................ 15, 133 Notice of Assessment ..................... 310 Notice of Objection ........................ 310 Nursing home expenses & disability amount .............. . 181, 184, 191

O Objection, Notice of ...................... 310 Odd jobs .......................................... 36 Old Age Security ............................. 269

Allowance ................................ 269 GIS ........................................... 269 Repayment of benefits ............ 270

Overpayments CPP .................................... 60, 104 EI ....................................... 64, 104

P Past service pension contributions .. 45 Past service pension adjustment (PSPA) ..................................... 200 Pension adjustment (PA) .............. 199



Pension adjustment reversal (PAR) ......................................... 199 Pension income amount .................. 289 Pension income splitting ................. 293

Benefits ...................................... 297 Drawbacks ................................. 297 Eligible Pension ......................... 293 Making the Election .................. 293 Net and Total Family Income Effects .................................. 298

Pensions CPP .................................. 135, 271 Foreign pensions ..................... 275 Old Age Security ..................... 269 Pension income ......................... 273 Registered pension plans ........ 274 Retirement compensation arrangements ...................... 279 RRIF payments ......................... 276 RRSP payments ........................ 280 Splitting ..................................... 293

Personal amounts .................... 69, 237 Basic personal amount ............... 74 Caregiver amount ....................... 83 Child amount ............................... 80 Dependants ............................... 70 Eligible dependant ............. 75, 239 Infirm dependants ...................... 81 Spouse or common-law partner amount ............ 74, 237

Political contribution ..................... 101 Professional dues ............................ 46 Progressive tax system ..................... 11 Proration, CPP contributions .......... 62 Provincial Parental Insurance Plan ....................................... 65,138 Provincial tax ........................... 11, 103 Public Transit Passes ....................... 84

R Records and receipts ......................... 21 Refund or balance owing................. 103 Refundable tax credits

CPP overpayment .............. 60, 104 EI overpayment ................. 64, 104 GST/HST rebate ........................ 104 Instalments ..................... 105, 298 Tax withheld at source ............ 103

Residence........................................... 10

RDSP ............................................. 175 Attribution Rules ...................... 178 Borrowing to Contribute ........... 177 Contributions ............................ 175 Director of the Plan ................... 176 Disability Assistance Payments ............................. 176 DTC-Eligible Individual ............ 175 Government Support ................. 177 Income ....................................... 177 Non-taxable Portion of RDSP Payments .................. 176 Plan Sustainability ................... 177 Qualifying Individuals .............. 175 Repayments ............................... 177 Tax Free Rollovers .................... 178 Withdrawal ................................ 177 Withholding Taxes .................... 177

RESP ............................................... 250 RPP

Contributions ............................ 45 Income ..................................... 274 Past service contributions ......... 45 Transfers ................................. 284

RRIF ............................................. 276 RRSP ............................................. 197

Annuities from ......................... 280 Carryforwards ........................... 198 Contributions .......................... 197 Deduction limit ........................ 198 Earned income ......................... 198 Excess contributions ............... 202 Home Buyers’ Plan .................. 205 Lifelong Learning Plan ............. 211 PSPA ........................................ 200 PA ............................................ 199 PAR ............................................ 199 Refund of premiums ................ 281 Spouse or common-law partner RRSPs ................... 204 Undeducted contributions ....... 201 Withdrawal of ............................ 203 Unused deduction room ............ 198

Repayment Employment income .................. 54 Employment Insurance ............. 138 Old Age Security ..................... 270

Research grants .............................. 38 Retirement compensation arrangements .......................... 279

328 Index


Retiring allowances ...................... 283 Transfers .................................. 287

Royalties ................................. 40, 118

S Safety deposit box ........................... 127 Same-sex partners ........................... 74 Savings Bonds (CSB) ...................... 119 Scholarships ................................. 249 Security options deduction .............. 56 Security options benefits .................. 56 Self-assessment ................................ 11 Separation during the year ............ 217

Child care deduction ............... 234 Canada Child Tax Benefit ...... 243 Eligible dependant amount ..... 239 GST/HST credit ...................... 242 Spouse or common-law partner amount ................. 237 Transfers from spouse or common-law partner ......... 242

Social assistance ........................... 134 Social benefits “clawback”

Employment insurance ........... 139 Old Age Security ..................... 270

Social Insurance Number ............... 23 Social Security (US) ....................... 276 Spouse or common-law partner

Amount for ......................... 74, 237 Amounts transferred from ................... 173, 263, 290 Definition of ................................ 71 RRSP ....................................... 204 Transfers of property to .......... 125

Stock options ................................... 56 Strike pay ....................................... 14 Students ......................................... 249 Education amount .................. 258 Income of ................................. 249 Moving expenses ..................... 264 Tuition fees ............................. 254 Student loan interest ................ 253 Supplementary unemployment benefit plans ............................. 40 Support payments ......................... 218

Child support ........................... 218 Fixed and periodic ................... 220 Legal fees .................................. 223 Ordering of payments ............... 221 Payments to a child ................. 221 Payments to others ................... 221

Personal amounts, effect on .... 222 Prior payments ......................... 219 Repayments of ......................... 223 Specific purpose payments ...... 220 Third party payments ............. 220 Taxable/deductible ................... 218 Written agreement .................. 219

T T1 return........................................... 16 Tax calculation ............................... 99 Taxable allowances .......................... 32 Taxation, history of .......................... 9 Tax-Free Savings Accounts ............ 212 Taxpayer relief provisions .............. 310 TELEFILE ....................................... 19 Textbook amount ............................ 258

Carryforward ........................... 260 Transfers .......................... 260, 263

Tips .................................................. 36 Training allowances ..................... 250 Transfers from spouse or partner ..................... 173, 263, 290 Transfers

Direct ...................................... 285 Indirect .................................... 287 To registered plans ................... 284

Treasury bills ................................ 120 Treaty, income exempt under ........ 146 Tuition fees ..................................... 254

Carryforward ............................ 260 Transfers ........................... 260, 263

U Undeducted RRSP contributions .. 201 Union dues ...................................... 46 Universal Child Care Benefit ............... .................. 24, 94, 105, 234, 243 Unregistered annuities ................ 278 Unused RRSP deduction room ..... 198 US Social Security .......................... 276

V Veteran’s Benefits ............................ 40 Vow of poverty .............................. 146



W Wage-loss replacement plans ......... 37 Workers’ compensation ................. 133 Working Income Tax Benefit .......... 148

Amount of Benefit ..................... 149 Disability Benefit ...................... 149 Eligible Dependant ................... 149 Eligible Spouse of Common-law Partner ................................. 149 Eligibility ................................... 148 Prepayment ............................... 152 Who Must Claim ....................... 152 Working Income ........................ 149

Income Tax I - Textbook 2010

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Transcript of Income Tax I - Textbook 2010