CRA issues updated information on tax collection policies
July 29, 2023
During the pandemic, relieving changes were made to the policies and practices of the Canada Revenue Agency (CRA) with respect to the collection of tax amounts owed by Canadians. In the past several months, the CRA has resumed its work to address taxpayer debt, meaning that benefit and credit payments and tax refunds may once again be applied by the CRA to pay down outstanding balances owed by a taxpayer.
The CRA recently updated and re-issued its Information Circular IC98-1R8, which outlines its current policies and practices on the collection of tax debts from Canadians. That updated Circular can be found on the CRA website at IC98-1R8 Tax Collections Policies – Canada.ca. More information on the CRA’s collection policies (including the availability of payment arrangements) can be found on the CRA website at When you owe money – collections at the CRA – Canada.ca.
Updated guide issued for Canada Child Benefit program for 2023-24
July 29, 2023
Through its Canada Child Benefit program, the federal government provides a non-taxable monthly benefit to parents of children under the age of 18. Benefit amounts are adjusted at the start of each benefit year: the current benefit year for the program runs from July 1, 2023 to June 30, 2024.
The Canada Revenue Agency has issued an updated publication outlining the terms of the program (including benefit amounts payable) for the current (2023-24) benefit year. That updated publication can be found on the Agency website at T4114 Canada Child Benefit and related provincial and territorial programs – Canada.ca.
How to respond to a first Instalment Reminder from the Canada Revenue Agency (July 2023)
July 19, 2023
By the time summer arrives, nearly all Canadians have filed their income tax returns for the previous year, have received a Notice of Assessment from the tax authorities with respect to that return and have either spent their tax refund or, more grudgingly, paid any balance of tax owing.
It’s a surprise, therefore, when unexpected mail arrives from the Canada Revenue Agency (usually in mid- to late July), and the information in that mail will likely be both unfamiliar and unwelcome. Specifically, the enclosed Instalment Reminder form will advise the recipient that, in the view of the CRA, he or she should make instalment payments of income tax on September 15 and December 15 of 2023 – and will helpfully identify the amounts which should be paid on each date.
No one particularly likes receiving unexpected mail from the tax authorities, and correspondence which suggests that the recipient should be making payments of income tax for 2023 to the CRA during the year (instead of when he or she files the return for 2023 in April 2024) is likely to be both perplexing and somewhat alarming. It’s fair to say that most Canadians aren’t familiar with the payment of income tax by instalments, and are therefore at a loss to know how to proceed the first time they receive an Instalment Reminder.
The reason that the instalment payment system is unfamiliar to most Canadians is that most of us pay income taxes during our working lives through a different system. Every Canadian employee has tax automatically deducted from his or her paycheque (“at source”), before that paycheque is issued, and that tax is remitted by the employer to the CRA on the employee’s behalf. Such deductions and remittances accrue to the employee’s benefit, and they are credited with those remittances when filing the annual tax return for that year. It’s an efficient system, but it’s also one which is largely invisible to the employee, and certainly one which operates without the need for the employee to take any steps on his or her own.
Where an individual is no longer an employee – for instance, he or she starts a business and becomes self-employed, or retires and begins to receive retirement income from various government and non-government sources – such deductions and remittances are no longer automatically made. However, Canadian tax rules provide that, where the amount of tax owed when a return is filed by the taxpayer is more than $3,000 ($1,800 for Québec residents) in the current (2023) year and either of the two previous (2021 and 2022) years, that taxpayer may be subject to the requirement to pay income tax by instalments.
The reason that first Instalment Reminders are issued in August has to do with the schedule on which Canadians file their tax returns. The amount of tax payable on filing for the immediately preceding year can’t be known until the tax return for that year has been filed and assessed, and the tax return filing deadline for individuals is April 30 (or June 15 for self-employed taxpayers and their spouses). Consequently, by the end of July, the CRA will have the information needed to determine whether a particular taxpayer should receive a first Instalment Reminder for the current year
Taxpayers who receive that first Instalment Reminder in July may also be puzzled by the fact that it is a “Reminder” and not a “Requirement” to pay. The reason for that is that those who receive it are not actually required by law to make instalment payments of tax. There are, in fact, three options open to the taxpayer who receives an Instalment Reminder.
First, the taxpayer can pay the amounts specified on the Reminder, by the respective due dates of September 15 and December 15. A taxpayer who does so can be certain that he or she will not have to pay any interest or penalty charges even if he or she does have to pay an additional amount on filing in the spring of 2024. If the instalments paid turn out to be more than the taxpayer’s tax liability for 2023, he or she will of course receive a refund on filing.
Second, the taxpayer can make instalment payments based on the total amount of tax which was owed and paid for the 2022 tax year (including any balance that was owed on filing). If a taxpayer’s income has not changed between 2022 and 2023 and his or her available deductions and credits remain the same, the likelihood is that total tax liability for 2023 will be slightly less than it was in 2022, owing to the indexation of tax brackets and tax credit amounts.
Third, the taxpayer can estimate the amount of tax which he or she will actually owe for 2023 and can pay instalments based on that estimate. Where a taxpayer’s income has dropped from 2022 to 2023 and there will consequently be a reduction in tax payable, this option may be worth considering. Taxpayers who wish to pursue this approach can obtain the information needed to estimate current-year taxes (federal and provincial tax brackets and rates) on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html#federal.
All of this may seem like a lot of research and calculation effort, especially when one considers that many Canadians don’t even prepare their own tax returns. And those who don’t want to be bothered with the intricacies of tax calculations can pay the amounts set out in the Instalment Reminder, secure in the knowledge that they will not incur any penalty or interest charges and that, should those amounts ultimately represent an overpayment of taxes, that overpayment will be recovered and refunded when the return for 2023 is filed next spring.
Once they have resigned themselves to the realities of the tax instalment system, the next question that most taxpayers have is how such payments can be made. The options open to taxpayers in that regard are helpfully outlined on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/making-payments-individuals/paying-your-income-tax-instalments/you-pay-your-instalments.html.
Making the RRSP decision when you turn 71 (July 2023)
July 19, 2023
The age at which Canadians retire and begin deriving income from government and private pensions and private retirement savings has become something of a moving target. At one time, reaching one’s 65th birthday marked the transition from working life to full retirement, and, usually, receipt of a monthly employee pension, along with government-sponsored retirement benefits. That is no longer the unvarying reality. The age at which Canadians retire can now span a decade or more, and retirement is more likely to be a gradual transition than a single event.
Today, Canadians can choose to begin receiving benefits from government-sponsored retirement benefit programs between the ages of 60 and 70. Canada Pension Plan retirement benefits can begin as early as age 60, and taxpayers can start collecting Old Age Security benefits at age 65. Receipt of income from either of those government sponsored retirement income plans can also be deferred until the age of 70.
There is, however, one retirement income “deadline” which is not flexible and must be adhered to by every Canadian who has saved for retirement through a registered retirement savings plan (RRSP). All holders of such plans are required to close out their RRSP by the end of the calendar year in which they turn 71 years of age – no exceptions and no extensions. The decision which must be made on how to do so is a very big one, as the course of action chosen will affect the individual’s income for the remainder of his or her life.
While the actual decision is a complex one, the options available to a taxpayer who must collapse an RRSP are actually quite few in number – three, to be precise. They are as follows:
- collapse the RRSP and include all of the proceeds in income for that year;
- collapse the RRSP and transfer all proceeds to a registered retirement income fund (RRIF); and/or
- collapse the RRSP and purchase an annuity with the proceeds.
It’s not hard to see that the first option doesn’t have much to recommend it. Collapsing an RRSP without transferring the balance to an RRIF or purchasing an annuity means that every dollar in the RRSP will be treated as taxable income for that year. In some cases, where a substantial six-figure amount has been saved in the RRSP, that can mean losing nearly half of the RRSP proceeds to income tax. And, while any balance of proceeds left can then be invested, tax will be payable on all investment income earned.
As a practical matter, then, the choices come down to two: an RRIF or an annuity. And, as is the case with most tax and financial planning decisions, the best choice will be driven by one’s personal financial and family circumstances, risk tolerance, cost of living, and the availability of other sources of income to meet such living costs.
The annuity route has the great advantages of simplicity and reliability. In exchange for a lump sum amount paid by the taxpayer, the issuer of that annuity agrees to pay the taxpayer a specific sum of money, usually once a month, for the remainder of his or her life. Annuities can also provide a guarantee period, in which the annuity payments continue for a specified time period (five years, 10 years), even if the taxpayer dies during that time. The amount of monthly income which can be received depends, of course, on the amount paid in, but also on the gender and, especially, the age of the taxpayer.
The other factor influencing the amount of income which can be received from an annuity is current interest rates. For many years, interest rates have been so low that an annuity purchase had very little to recommend it. Over the past 14 months, however, the Bank of Canada has raised interest rates several times, and annuity payment rates have risen as a result. Currently, annuity rates for each $100,000 paid to the annuity issuer by a taxpayer who is 70 years of age range from $636 to $672 per month for a male taxpayer and from $588 to $621 for a female taxpayer (the actual rate is set by the company which issues the annuity). Those rates do not include any guarantee period.
For taxpayers whose primary objective is to obtain a guaranteed life-long income stream without the responsibility of making any investment decisions or the need to take any investment risk, an annuity can be an attractive option. There are, however, some potential downsides to be considered. First, an annuity can never be reversed. Once the taxpayer has signed the annuity contract and transferred the funds, he or she is locked into that annuity arrangement for the remainder of his or her life, regardless of any change in circumstances that might mean an annuity is no longer suitable. Second, unless the annuity contract includes a guarantee period, there is no way of knowing how many payments the taxpayer will receive. If he or she dies within a short period of time after the annuity is put in place, there is no refund of amounts invested – once the initial transfer is made at the time the annuity is purchased, all funds transferred belong to the annuity company. Third, most annuity payment schedules do not keep up with inflation – while it is possible to obtain an annuity in which payments are indexed, having that feature will mean a substantially lower monthly payout amount. Finally, where the amount paid to obtain the annuity represents most or all of the taxpayer’s assets, entering into the annuity arrangement means that the taxpayer will not be leaving an estate for his or heirs.
The second option open to taxpayers is to collapse the RRSP and transfer the entire balance to a registered retirement income fund, or RRIF. An RRIF operates in much the same way as an RRSP, with two major differences. First, it’s not possible to contribute funds to an RRIF. Second, the taxpayer is required to withdraw an amount from his or her RRIF (and to pay tax on that amount) each year. That minimum withdrawal amount is a percentage of the outstanding balance, with that percentage figure determined by the taxpayer’s age at the beginning of the year. While the taxpayer can always withdraw more in a year (and pay tax on that withdrawal), he or she cannot withdraw less than the minimum required withdrawal for his or her age group.
Where a taxpayer holds savings in an RRIF, he or she can invest those funds in the same investment vehicles as were used while the funds were held in an RRSP. And, as with an RRSP, investment income earned by funds held inside an RRIF are not taxed as they are earned. While the ability to continue holding investments that can grow on a tax-sheltered basis provides the taxpayer with a lot of flexibility, that flexibility has a price in the form of investment risk. As is the case with all investments, the investments held within an RRIF can increase in value – or decrease – and the taxpayer carries the entire investment risk. When things go the way every investor wants them to, investment income is earned while the taxpayer’s underlying capital is maintained, but that result is never guaranteed.
On the death of an RRIF annuitant, any funds remaining in the RRIF can pass to the annuitant’s spouse on a tax-free basis. Where there is no spouse, the remaining funds in the RRIF will be income to the RRIF annuitant in the year of death, and any balance will become part of his or her estate.
While the above discussion of RRIFs versus annuities focuses on the benefits and downsides of each, it’s not necessary, and in most cases not advisable, to limit the options to an either/or choice. It is possible to achieve, to a degree, the seemingly irreconcilable goals of lifetime income security and capital (and estate) growth. Combining the two alternatives – annuity and RRIF – either now or in the future can go a long way toward satisfying both objectives.
For everyone, in retirement or not, spending is a combination of non-discretionary and discretionary items. The first category is made up mostly of expenditures for income tax, housing (whether rent or the cost of maintaining a house), food, insurance costs, and (especially for older Canadians) the cost of out-of-pocket medical expenses. The second category of discretionary expenses includes entertainment, travel, and the cost of any hobbies or interests pursued. A strategy which utilizes a portion of RRSP savings to create a secure lifelong income stream to cover non-discretionary costs can remove the worry of outliving one’s money, while the balance of savings can be invested for growth and to provide the income for discretionary spending.
Such a secure income stream can, of course, be created by purchasing an annuity. As well, although most taxpayers don’t think of them in that way, the Canada Pension Plan and Old Age Security have many of the attributes of an annuity, with the added benefit that both are indexed to inflation. By age 71, all taxpayers who are eligible for CPP and OAS will have begun receiving those monthly benefits. Consequently, in making the RRIF/annuity decision at that age, taxpayers should include in their calculations the extent to which CPP and OAS benefits will pay for their non-discretionary living costs.
As of July 2023, the maximum OAS benefit for most Canadians (specifically, those who have lived in Canada for 40 years after the age of 18) is about $699 per month. The amount of CPP benefits receivable by the taxpayer will vary, depending on his or her work history, but the maximum current benefit which can be received at age 65 is about $1,306. As a result, a single taxpayer who receives the maximum CPP and OAS benefits at age 65 will have just over $24,000 in annual income (about $2005 per month). And, for a married couple, of course, the total annual income received from CPP and OAS can be about $48,000 annually, or $4,010 per month. While $24,000 a year isn’t usually enough to provide a comfortable retirement, for those who go into retirement in good financial shape – meaning, generally, without any debt – it can go a long way toward meeting non-discretionary living costs. In other words, most Canadians who are facing the annuity versus RRIF decision already have a source of income which is effectively guaranteed for their lifetime and which is indexed to inflation. Taxpayers who are considering the purchase of an annuity to create the income stream required to cover non-discretionary expenses should first determine how much of those expenses can already be met by the combination of their (and their spouse’s) CPP and OAS benefits. The amount of any annuity purchase can then be set to cover off any shortfall.
While the options available to a taxpayer at age 71 with respect to the structuring of future retirement income are relatively straightforward, the number of factors to be considered in assessing those factors and making that decision are not. All of that makes for a situation in which consulting with an independent financial advisor on the right mix of choices and investments isn’t just a good idea, it’s a necessary one.
Increases to Old Age Security benefits effective July 2023
July 15, 2023
The federal government has announced that maximum payments under the Old Age Security program will increase for the July to September 2023 benefit period.
Effective with the July 2023 payment, the maximum OAS benefit for recipients aged 65 to 74 will increase to $698.60. As of the same date, the maximum payment for OAS recipients aged 75 and older will increase to $768.46.
More information on the changes to OAS and related benefits for the July to September 2023 benefit period can be found on the federal government website at https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html.
Advance payment of Canada Workers’ Benefit begins in July 2023
July 7, 2023
The Canada Workers’ Benefit (CWB) is a refundable tax credit provided to lower-income individuals and families which have working income from employment or self-employment.
In previous years, the CWB was paid once an individual had filed his or her tax return for the previous year. However, starting in July 2023, CWB recipients will receive half of their CWB allotment in quarterly instalments in July, October, and January. The remaining amount will be reconciled once the tax return for 2023 is filed next spring.
More information on the CWB, including eligibility requirements and benefit amounts, can be found on the federal government website at Canada.ca/canada-workers-benefit.
Taxpayer relief for Canadians affected by wildfires
July 1, 2023
The Canada Revenue Agency has issued a reminder to Canadians of the availability of administrative relief from tax interest and penalty charges for taxpayers who have been affected by this spring’s wildfires.
Such relief is provided through the Taxpayer Relief Program, which enables the Agency to waive interest and penalty charges which would otherwise be imposed where taxpayers are unable to meet their tax filing or payment obligations for reasons outside their control.
Detailed information on the Taxpayer Relief Program, including the criteria used by the CRA to determine eligibility, as well as how to apply, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/taxpayer-relief-provisions.html.
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