TaxMatters@EY – November 2023

Maureen De Lisser and Alan Roth, Toronto

Have you ever found yourself looking for tax savings while completing your tax return in April? If so, you’ve probably realized that at that point there’s not much you can do to reduce your balance owing or increase your refund balance. By the time you prepare your tax return, you’re looking back and simply reporting on the year that has ended.

But don’t worry. As we approach the end of the year, there’s still some time left for forward-looking planning. You can approach year-end planning by asking yourself questions or going through a checklist. Following a framework for year-end tax planning, such as the one we suggest at the end of this article, can also be helpful.

Taking time out of your busy November and December to think about these questions can help you find better answers that may save you money on your 2023 tax bill and beyond.

Part 1 of “Asking better year-end tax planning questions” looks at the questions, topics and tax planning techniques that may apply to you each year. Part 2, which will appear in next month’s edition, will focus on both upcoming and recent personal tax changes, including changes to the alternative minimum tax, the new tax-free first home savings account, multigenerational home renovation tax credit and the residential property flipping rule.¹

Are there any income-splitting techniques available to you?

You may be able to reduce your family’s overall tax burden by taking advantage of differences in your family members’ marginal income tax brackets using one or a combination of the following:

• Income-splitting loans – You can loan funds to a family member at the prescribed interest rate of 5% (for loans made after March 31, 2023).² The family member can invest the money and the investment income will not be attributed to you (i.e., treated as your income for tax purposes), as long as the interest for each calendar year is paid no later than January 30 of the following year.
• Reasonable salaries to family members – If you have a business, consider employing your spouse or partner and/or your children to take advantage of income-splitting opportunities. Their salaries must be reasonable for the work they perform.³ However, other income-splitting opportunities involving your business may be limited (see below re: income-splitting private corporation business earnings).
• Spousal RRSPs – In addition to splitting income in retirement years, spousal RRSPs may be used to split income before retirement. The higher-income spouse or partner can get the benefit of making contributions to a spousal plan at a high tax rate and, after a three-year non-contribution period, the lower- or no-income spouse can withdraw funds and pay little or no tax.
• Pension income splitting – If you are receiving certain eligible types of pension income in 2023, you may be able to elect to transfer up to one half of your eligible pension income to your spouse or common-law partner, or vice versa. Pension income splitting can produce significant tax savings for some couples. However, the magnitude of the savings will depend on a number of factors.⁴

Have you paid your 2023 tax-deductible or tax-creditable expenses yet?

• Tax-deductible expenses – A variety of expenses, including interest and child-care costs, can only be claimed as deductions in a tax return if the amounts are paid by the end of the calendar year.
• Expenditures that give rise to tax credits – Charitable donations, political contributions, medical expenses, home accessibility renovation expenses, digital news subscription expenses, and tuition fees must be paid in the year (or, in the case of medical expenses, in any 12-month period ending in the year) in order to be creditable.
• Consider whether deductions or credits may be worth more to you this year or next year – If you can control the timing of deductions or credits, consider any expected changes in your income level and tax bracket or marginal personal income tax rate. Deductions will be worth more when you are subject to a higher marginal rate. In addition, your income level may affect the availability or value of certain tax credits (such as the medical expense credit and donation credit).⁵

Are you self-employed and deducting capital expenditures in your business or profession?

If you are a self-employed individual earning unincorporated business, professional or rental income, you are entitled to claim capital cost allowance (CCA) on depreciable capital property (e.g., computers, office furniture, and tools and machinery) if the property is acquired and available for use before the end of the year to earn such income. The amount deductible for the year depends on the CCA class to which the property belongs.

The accelerated investment incentive property rules significantly accelerate CCA claims for most new depreciable capital property acquisitions made before 2028. Certain properties, such as manufacturing and processing machinery and equipment, are eligible for full expensing in the year of acquisition on a temporary basis, up to and including 2023. The accelerated CCA rules apply to eligible property acquired and available for use after November 20, 2018 and before 2028, subject to certain restrictions.

For more details on these measures, see Chapter 6, Professionals and Business Owners, in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Under recently enacted measures, there is a temporary expansion of assets eligible for immediate expensing. This includes assets up to a maximum of $1.5 million per taxation year for certain classes of depreciable capital property acquired by a Canadian-resident individual after December 31, 2021 that become available for use before January 1, 2025.⁶

Many types of assets are eligible for immediate expensing, but certain classes of assets — generally for long-lived assets — are specifically excluded, including buildings and intangible assets such as goodwill. No carryforward is available if the full $1.5 million amount is not used in a particular taxation year.

You must choose which immediate expensing property, if any, you wish to expense under these special rules by designating the property as a designated immediate expensing property in respect of the year it becomes available for use in your business or profession. Capital assets not subject to, or designated for, immediate expensing may continue to be depreciated using either the regular or accelerated (if eligible) CCA rates.

For further details, see EY Tax Alert 2022 Issue No. 30.

Do you hold passive investments in your private corporation?

A Canadian-controlled private corporation’s (CCPC’s) access to the small business deduction and, accordingly, the small business tax rate,⁷ may be limited by the amount of passive investment income earned in the preceding year. Consult your tax advisor for possible strategies to mitigate the adverse impact of these rules.

For example, if you are considering realizing accrued gains in the corporation’s investment portfolio before its 2023 taxation year end and the company is likely to cross the $50,000 income threshold by doing so, consider deferring the gains to the following year so that the 2024 taxation year is not impacted. You may also consider the pros and cons of holding a portion or all of the portfolio personally instead of in the company.

The impact of these rules on CCPCs subject to taxation in Ontario or New Brunswick is smaller because both provinces have confirmed they are not adopting them for purposes of their respective provincial small business deductions.

For more information, see Chapter 6, Professionals and Business Owners, in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Do you income-split private corporation business earnings with adult family members?

Income tax rules may limit income splitting opportunities with certain adult family members through the use of private corporations.

For example, a business is operated through a private corporation, and an adult family member in a low income tax bracket subscribes for shares in the corporation. A portion of the business’s earnings is distributed to the family member by paying dividends. The tax on split income rules apply the highest marginal personal income tax rate (federal rate of 33% for 2023) to the dividend income received unless the family member meets one of the legislated exceptions to the application of this tax. For example, if the adult family member is actively engaged in the business on a regular basis by working an average of at least 20 hours per week during the year (or in any five previous, not necessarily consecutive, years), the tax on split income may not apply.

Consult with your tax advisor to learn more about how these rules might apply in your specific circumstances.

For more information about these rules, see “The revised tax on split income rules” (Appendix E) in the latest version of Managing Your Personal Taxes: a Canadian Perspective, TaxMatters@EY, February 2020, “Tax on split income: CRA provides clarifications on the excluded shares exception,” and TaxMatters@EY November 2020, “Tax on split income: The excluded business exception.“

Have you maximized your tax-sheltered investments by contributing to a TFSA or an RRSP?

• Tax-free savings account (TFSA) – Make your contribution for 2023 and catch up on prior non-contributory years. You won’t get a deduction for the contribution, but you will benefit from tax-free earnings on invested funds. Also, to maximize tax-free earnings, consider making your 2024 contribution in January.
• TFSA withdrawals and recontributions – TFSA withdrawals are tax-free and any funds withdrawn in the year are added to your contribution room in the following year. But if you have made the maximum amount of TFSA contributions each year⁸ and withdraw an amount in the year, recontributions made in the same year may result in an overcontribution, which would be subject to a penalty tax. If you have no available contribution room and are planning to withdraw an amount from your TFSA, consider doing so before the end of 2023, so that it’s possible to recontribute in 2024 without affecting your 2024 contribution limit. For more information about the adverse consequences of overcontributing to your TFSA, see TaxMatters@EY, October 2021, “TFSAs: inability to rectify unintended overcontribution may lead to penalties.”⁹
• Registered retirement savings plan (RRSP) – The earlier you contribute, the more time your investments have to grow. So consider making your 2024 contribution in early 2024 to maximize the tax-deferred growth. If your income is low in 2023, but you expect to be in a higher bracket in 2024 or beyond, consider contributing to your RRSP as early as possible, but holding off on taking the deduction until a future year when you will be in a higher tax bracket.
  
  If you turn, or have turned, 71 years old in 2023, you must make any final contributions to your RRSP on or before December 31, 2023 to obtain a tax deduction on your 2023 personal tax return. In addition, you need to close your RRSP by the end of the year. You can choose to close your RRSP by withdrawing the funds, which would be subject to full taxation in the year withdrawn, or transferring the funds to a registered retirement income fund (RRIF) or purchasing an annuity, either of which will allow for some continued tax deferral.
  
  If you have any remaining unused RRSP deduction room after your final RRSP contribution and your spouse or common-law partner is younger, you may continue to contribute to a spousal or common-law partner RRSP until the end of the year in which your spouse or common-law partner turns 71.
  
  For additional tax planning tips relating to RRSPs, see the Retirement Planning chapter in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Are you considering becoming a first-time home buyer?

If you’re a first-time home buyer,¹⁰ the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000¹¹ from your RRSP to finance the purchase of a home. No tax is withheld on RRSP withdrawals made under this plan. If you withdraw funds from your RRSP under the HBP, you must acquire a home by October 1 of the year following the year of withdrawal, and you must repay the withdrawn funds to your RRSP over a period of up to 15 years, starting in the second calendar year after withdrawal. Therefore, if possible, consider waiting until after the end of the year before making a withdrawal under the HBP to extend both the home purchase and repayment deadlines by one year.

A new type of registered account, the tax-free first home savings account (FHSA), is also available to help individuals save for a down payment on their first home. A first-time home buyer may make withdrawals under both the FHSA and the HBP in respect of the same qualifying home purchase. We’ll elaborate further in Part 2 of “Asking better year-end tax planning questions” in next month’s edition of TaxMatters@EY.

Also, first-time home buyers who acquire a qualifying home may be eligible to claim a non-refundable federal income tax credit of up to $1,500.¹²

You are considered a first-time home buyer for purposes of this credit if neither you nor your spouse or common-law partner owned a home and lived in it as your principal place of residence in the calendar year of purchase or in the preceding four calendar years. In addition, the property must be occupied as your principal place of residence within one year of its acquisition. The credit may be split with your spouse or common-law partner, or with another individual, if any, who jointly owns the property with you, which may be your spouse or common-law partner, as long as the total credit claimed by you and the other individual does not exceed the maximum credit.

Have you maximized your education savings by contributing to an RESP for your child or grandchild?

• Contributions – Make registered education savings plan (RESP) contributions for your child or grandchild before the end of the year. With a contribution of $2,500 per child under age 18, the federal government will contribute a grant of $500 annually up to a lifetime maximum of $7,200 per beneficiary.¹³
• Non-contributory years – If you have prior non-contributory years, the annual grant can be as much as $1,000 in respect of a $5,000 contribution.¹⁴

Is there a way to reduce or eliminate your non-deductible interest?

Interest on funds borrowed for personal purposes is not deductible. Where possible, consider using available cash to repay personal debt before repaying loans for investment or business purposes on which interest may be deductible.

Have you reviewed your investment portfolio?

Accrued losses to use against realized gains – While taxes should not drive your investment decisions, it may make sense to sell loss securities to offset capital gains realized earlier in the year. If the losses realized exceed gains realized in the year, they can be carried back and claimed against net gains in the preceding three years. Note that the last stock trading date for settlement of a securities trade in 2023 is Wednesday, December 27, 2023 for securities listed on Canadian or US stock exchanges.

Just remember to be careful of the superficial loss rules, which may apply to deny a capital loss on the disposition of a security. These rules may apply if you, your spouse or common-law partner, a company either of you controls, or an affiliated partnership or trust (such as your RRSP, RRIF, TFSA or RESP) acquires the same or an identical security within the period beginning 30 days before and ending 30 days after the disposition, and the security is still owned at the end of that period.

Realized losses to carry forward – If you have capital loss carryforwards from prior years, you might consider cashing in on some of the winners in your portfolio. As noted above, be aware of the December 27, 2023 deadline for selling securities listed on a Canadian or US stock exchange to ensure that the trade is settled in 2023. Or consider transferring qualified securities with accrued gains to your TFSA or RRSP (up to your contribution limit). The resulting capital gain will be offset by available capital losses, and you will benefit from tax-free (TFSA) or tax-deferred (RRSP) future earnings on these securities.

Donation of securities with accrued gains – You may also want to consider donating publicly traded securities (e.g., stocks, bonds, Canadian mutual fund units or shares) with accrued gains to a charitable organization or foundation. If you do, the resulting capital gain will not be subject to tax and you will also receive a donation receipt equal to the fair market value of the donated securities.

Can you improve the cash flow impact of your income taxes?

Make sure you filed your prior-year return – If you didn’t file your 2022 personal income tax return because you didn’t owe any taxes, you may be missing out on certain refundable tax credits and benefits to which you may be entitled, such as the GST/HST credit and climate action incentive payments. You must reside in Alberta, Ontario, Manitoba, Saskatchewan, Newfoundland and Labrador, Nova Scotia, Prince Edward Island or New Brunswick to be eligible for climate action incentive payments, the payment of which does not depend on income level.¹⁵

Request reduced source deductions – If you regularly receive tax refunds because of deductible RRSP contributions, child-care costs or spousal support payments, consider requesting CRA authorization to allow your employer to reduce the tax withheld from your salary (Form T1213). Although it won’t help for your 2023 taxes, in 2024 you’ll receive the tax benefit of those deductions all year instead of waiting until after your 2024 tax return is filed.

Determine requirement to make a December 15 instalment payment – If you expect your 2023 final tax liability to be significantly lower than your 2022 liability (for example, due to lower income from a particular source, losses realized in 2023 or additional deductions available in 2023) you may have already paid enough in instalments. You are not required to follow the CRA’s suggested schedule and are entitled to base your instalments on your expected 2023 liability. However, if you underestimate your 2023 balance and your instalments end up being insufficient, or the first two instalments (due in March and June) were too low, you will be faced with interest and possibly a penalty.¹⁶

Can the underused housing tax impact you if you are a Canadian citizen or permanent resident?

The federal government has introduced an annual 1% tax on the value of vacant or underused residential property that is directly or indirectly owned by nonresident non-Canadians — that is, individuals who are neither Canadian citizens nor permanent residents of Canada — effective January 1, 2022. Certain exemptions apply.¹⁷

The legislation also includes a broad annual requirement for the filing of a separate tax return in respect of each residential property. Even if one of the exemptions from the tax applies to a nonresident non-Canadian for a calendar year, the filing requirement still applies for that year.

If you own a residential property in Canada that is vacant or underused and you are a Canadian citizen or permanent resident of Canada, you won't be subject to this new tax or the annual filing requirement. But if the property is held on your behalf, for example, by a trust under a bare trustee arrangement, the bare trustee will be exempt from the annual underused housing tax but will be required to file an annual return in respect of the property.¹⁸ This may also be the case if the property is held on your behalf by a partnership or privately owned corporation.

A return for a calendar year is due on or before April 30 of the following calendar year. As a result, a return for the 2023 calendar year must be filed on or before April 30, 2024. Failure to file a return as and when required may result in the imposition of significant penalties.

For further details, see EY Tax Alert 2022 Issue No. 35, EY Tax Alert 2023 Issue No. 10, and EY Tax Alert 2023 Issue 39.

Have you thought about estate planning?

Review your will – You should review and update your will periodically to ensure that it reflects changes in your family status and financial situation, as well as changes in the law.

Consider your life insurance needs – Life insurance is an important tool to provide for the payment of various debts (including taxes) that may be payable as a result of your death, as well as to provide your dependants with money to replace your earnings. Review your coverage to ensure that it remains appropriate for your financial situation.

Consider an estate freeze to manage tax on death and/or probate fees – An estate freeze is the primary tool used to manage the amount of tax that may arise on death and involves locking in (i.e., “freezing”) the value of a business, investments or other assets and transferring the future growth of those assets to family members. Consider the impact of the tax rules for testamentary trusts, graduated rate estates and charitable planned giving, and the impact of the tax on split income rules (see above – Do you income-split private corporation business earnings with adult family members?) on income-splitting strategies using estate freezes.

For example, an estate freeze is set up where parents transfer the future growth in value of a business to the next generation. Dividends paid to an adult child may be subject to the highest marginal personal income tax rate under the tax on split income rules unless the individual meets one of the legislated exceptions to the application of this tax.

For details, see Chapter 12, Estate Planning, in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Consider a succession plan for your business – A succession plan involves devising a strategy to ensure that the benefit of your business assets passes to the right people at the right time.

These questions may seem familiar, but as tax rules become more complex, it becomes more important to think of the bigger tax picture continuously throughout the year, as well as from year to year as your personal circumstances change. Start a conversation with your tax advisor to find better answers.

Evelyn Tang, Calgary

In Scott Nicoll v The King, the Tax Court of Canada found that an employee whose employment was governed under a collective agreement between his union and his employer was not entitled to exclude travel and motor vehicle allowances from his employment income, nor was he entitled to deduct travel and motor vehicle expenses. The Court held that the streamlined reimbursement process under the agreement prevented the employee from being able to apply sections 6 and 8 of the Income Tax Act (the Act).

Facts

The employee was a boilermaker who regularly travelled from his home in Kelowna, BC to jobs in various out-of-town locations. The terms of his employment were governed by the agreement.

The agreement was newly negotiated for the 2014 to 2020 years, and the relevant terms of reimbursement for travel by way of an allowance were as follows:

• The employer paid an initial and terminal travel allowance using the CRA’s annual per-kilometre vehicle rate.
• The allowance was calculated using Burnaby City Hall as a common starting point for all workers, even if the employee did not actually set out from that point.
• No additional payment or reimbursement was provided for travel time or expenses incurred, with specific exceptions for fares for ferries, tolls, taxis and planes, and project-specific agreements between the union and the employer that a standard allowance would be paid to everyone.

This new regime was aimed at streamlining the process for reimbursing employees for travel by eliminating the need for the submission of receipts and calculating simple mileage using a common starting point for all trips. Once the employee was dispatched to an out-of-town worksite, he automatically received the allowance.

The CRA included the travel allowances received by the employee in 2014 and 2015 in his employment income. The employee appealed to the Tax Court of Canada.

Court’s analysis and decision

The issues before the Court were whether the travel allowances were properly included as employment income, and whether any amount of the travel or motor vehicle expenses was deductible from employment income.

Relevant statutory provisions

Section 6 of the Act sets out the amounts to be included in employment income, subject to certain exceptions. Specifically, subparagraphs 6(1)(b)(vii) and (vii.1) provide that reasonable allowances for travel and motor vehicle expenses may be excluded from employment income if certain conditions are met.

A reasonable allowance for travel expenses must meet the following conditions:

• The employee travels away from the municipality and metro area of the place of business where they ordinarily work or report to.
• The allowance is received in respect of the performance of employment duties.

A reasonable allowance for motor vehicle expenses must meet the following conditions:¹

• The measurement of usage is based solely on the kilometres driven.
• It is received in respect of the performance of employment duties.

When an allowance is considered unreasonable, the entire allowance is required to be included in employment income. However, the corresponding deduction provisions for travel and motor vehicle expenses contained in paragraphs 8(1)(h) and (h.1) of the Act may apply to allow these expenses to be deducted from income.

Under paragraphs 8(1)(h) and (h.1), travel and motor vehicle expenses may be deducted from income where the employee was ordinarily required to carry on his employment away from the employer’s place of business or in different places and was required under the employment contract to pay for these expenses.

Determination of a reasonable allowance

For the exclusion of a travel expenses allowance to apply, the wording in the Act requires that the employee is travelling away from the municipality and metro area of the employer’s office. The agreement in this case used Burnaby City Hall as the starting point, which had no connection to the employer’s office. Accordingly, it was the Court’s view that the travel allowance did not meet the conditions to be excluded from the employee’s income.

For the exclusion of a motor vehicle expenses allowance to apply, the usage measurement must be based solely on the kilometres driven. Since Burnaby City Hall was an arbitrary starting point, it did not reflect the actual kilometres the employee travelled. Accordingly, the allowance would be deemed unreasonable.

Special work site or remote location

The employee also raised the possibility of applying the exemptions under subsection 6(6) of the Act related to employment at a special work site or remote location. This provision excludes from income the value of a reasonable allowance for board and lodging, and transportation in certain situations.

Transportation expenses for the special work site exemption must be for transportation between the principal place of residence and the special work site, and transportation expenses for the remote location exemption must be for transportation between the remote location and a location in Canada or in the country where the taxpayer is employed.

Because Burnaby City Hall was used as the starting point, the employee was disqualified from applying the special work site exemption since the allowance was not determined using his principal place of residence. For the remote location exemption, the Court found that there was insufficient evidence as to which work locations might be considered remote.

Determination of deductible expenses

As to whether the corresponding deduction provisions could be applied in this instance, the Court found that the challenge was with the evidence. The employee attempted to deduct expenses that were equivalent to the allowance amounts, rather than the actual amount of the expenses that would be deductible. Unfortunately, this was likely due to the fact that the streamlined reimbursement system under the employee’s agreement did not require any records of the actual expenses to be maintained.

Lessons learned

The failure to consider the tax treatment or the availability of certain tax provisions when negotiating employment and collective agreements can result in unintended tax implications for the employees and seemingly unfair consequences for the taxpayer. While the Court seemed to be sympathetic to the taxpayer’s situation, it must still apply the provisions of the Act as they stand.

Accordingly, it is crucial that although tax consequences may not always be top of mind when negotiating agreements, employee unions should carefully consider whether the terms of the agreements may result in unfair tax treatment to employees.

Last, because this decision is an informal procedure case, the results are not binding on the CRA or any other court, even where the facts are very similar. However, the decision reached is likely the correct result based on the wording of the Act and, as such, a similar decision would likely be reached under a general procedure.  

Tax Alerts – Canada

Tax Alert 2023 No. 39 – Underused Housing Tax Act: 2022 filing deadline fast approaching and no extensions announced for 2023