New measures to assist at-risk homeowners (November 2023)

November 28, 2023

The 10-fold increase in interest rates since March of 2022 has affected Canadians in almost every area of their financial lives, as individuals and families struggle to cope with the every-increasing bite that interest costs take out of their budgets.

Probably no group has been more affected by increased interest costs than homeowners who have a mortgage on their family home and must find room in their budget to make ever-increasing payments on that mortgage.

There are basically two types of mortgages held by Canadians. The first is a fixed rate mortgage in which, as the name implies, the rate of interest payable is set for a fixed term of, usually, one to five years. The required monthly payment is also set for the entire term and will not change, meaning that such homeowners are not affected by any change in interest rates during the current term of their mortgage. They will, however, have to renew that mortgage at the end of the current term, at whatever interest rates are then in effect.

The other major type of mortgage financing is a variable rate mortgage, in which the interest rate payable on the mortgage amount goes up with every interest rate increase announced by the Bank of Canada and passed on to consumers by Canadian financial institutions. Homeowners who have a variable rate mortgage can have one of two types of repayment arrangements. The Financial Consumer Agency of Canada explains the two types of payment arrangements in this way:

Adjustable payments with a variable interest rate

With adjustable payments, the amount of the required mortgage payment changes if the interest rate changes. A set amount of each payment applies to the principal amount of the mortgage (the loan amount), while the interest rate portion changes as interest rates change.

Fixed payments with a variable interest rate

With fixed payments, although the rate of interest payable changes as interest rates change, the amount of the required mortgage payment stays the same.

However, when interest rates change, the allocation of that fixed payment between principal and interest also changes. If the interest rate goes up, more of the payment goes towards the interest, and less to the principal. If the interest rate goes down, more of the payment goes towards the principal.

Where interest rates increase substantially, as they have done over the past year and half, homeowners who have a variable interest rate mortgage with fixed payments are at risk of reaching the point at which their payments no longer cover even the required interest payment. In other words, although they are making payments on time and in the required set amount, their overall mortgage principal is increasing every month, as interest amounts which have not been paid are added to that mortgage principal – a situation known as negative amortization. 

Finally, while holders of fixed rate mortgages (in which the interest rate does not change during the term of the mortgage) are currently sheltered from the impact of increased interest rates, they are unlikely to remain in that position much longer. According to the Bank of Canada, almost all borrowers will see an increase in mortgage interest costs over the next three years, and the Bank’s data suggests that holders of fixed rate mortgages will see their payments increase by between 20% and 25% at their next renewal. 

Looking at the current pressures being experienced by holders of variable rate mortgages, as well as the impact that mortgage renewals will have in the near future on holders of fixed rate mortgages, the Financial Consumer Agency of Canada (FCAC – a federal agency whose responsibilities include protecting the rights and interests of consumers of financial products and services and supervising federally regulated financial entities, such as banks) determined that new measures were needed to address both current and upcoming risks. Those measures outline the expectations of the FCAC with respect to mortgage lending practices by federally regulated financial institutions (which would include all major lenders – a full listing can be found at https://www.osfi-bsif.gc.ca/Eng/wt-ow/Pages/wwr-er.aspx?sAll= 1), in situations in which homeowners can be characterized as “consumers at risk” with respect to their mortgage payment obligations. For purposes of the new guidelines, “consumers at risk” means those who have variable rate mortgages and whose payments (or the portion of their payments allocated to interest charges) have increased materially, or who may be facing negative amortization, or those who have fixed rate mortgages which will be up for renewal in the near future and who are also facing a material increase in payments.

Where a homeowner is facing a material increase in mortgage payments, or negative amortization, the FCAC’s expectation is that the financial institution holding that mortgage will provide temporary mortgage relief in the following specific ways:

• waiving prepayment penalties where such a homeowner makes a lump sum payment to avoid negative amortization, or sells their principal residence;
• waiving, for a limited period, internal fees or costs which would otherwise be charged when mortgage relief measures are activated: and
• ensuring, for a limited time, that where mortgage relief measures result in negative amortization no interest is charged on interest which has been added to mortgage principal.

Where homeowners fall short or fall behind in meeting their mortgage payment obligations, the longer-term financial repercussions – in the form of higher interest rates charged on future borrowings, or a negative impact on the homeowner’s credit rating, or both – can be significant. The new guidelines address both of those risks, as follows:

• at the time of mortgage renewal, the homeowner should not be offered a less advantageous interest rate based on the homeowner’s inability to adjust his or her mortgage agreement, or to qualify with other lenders; and
• where mortgage relief measures are provided, and the new arrangements include the ability to make a late payment or be delinquent on the mortgage generally, those late payments or that delinquency should not be reflected on the homeowner’s credit report.

Where homeowners run into difficulty with paying their mortgage, one of the relief measures which can be provided is to extend the time period over which the mortgage must be repaid – the amortization period. While an extension of the amortization period will mean lower payments, those lower payments also mean that more interest will be paid over the life of the mortgage and, of course, that it will take longer before the homeowner is mortgage-free.

Extension of the amortization period of a mortgage is one of the relief measures set out in the new guidelines. However, those guidelines also impose specific steps to be taken by the financial institution which provides the extended amortization. Any such extension must be for the shortest period possible, and the financial institution is expected to work with the homeowner to develop a plan which:

• ensures that the total amortization period is reasonable;
• includes information about options to restore the amortization to its original period; and
• includes an assessment and communication of the potential long-term, negative financial implications of the change in the amortization period.

Finally, where any mortgage relief measures are provided, the onus is on the financial institution to provide specific information to the homeowner before implementing any such measures. That information must include:

• the outstanding amount owing on the original credit agreement for the mortgage before the mortgage relief measures take effect;
• the impact of the mortgage relief measures on the total cost of servicing the mortgage, in dollar figures, as well as the remaining amortization (or repayment) period after the relief measures take effect;
• the new payment amount, due date, and frequency;
• the new interest rate and type (that is, fixed or variable); and
• the date on which the changes will take effect.

The new guidelines expect financial institutions to proactively monitor their clients to permit early identification of signs of financial stress, and to proactively contact consumers at risk regarding possible mortgage relief measures. However, consumers who are at risk of falling into default on their mortgage obligations are well-advised to also be proactive in contacting their financial institution where mortgage relief is needed – armed with knowledge of the kinds of relief which can be provided, and on what terms.

Detailed information on the new mortgage relief guidelines is available on the federal government website at https://www.canada.ca/en/financial-consumer-agency/services/industry/commissioner-guidance/mortgage-loans-exceptional-circumstances.html.

Tax planning for year-end charitable donations (November 2023)

November 28, 2023

Canadians have a well-deserved reputation for supporting charitable causes, through donations of both money and goods. Our tax system supports that generosity by providing a tax credit for qualifying donations made and, in all cases, in order to claim a credit for a donation in a particular tax year, that donation must be made by the end of that calendar year.

There is, however, another reason to ensure donations are made by December 31. The credit provided by the federal government is a two-level credit, in which the percentage credit claimable increases with the amount of donation made. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess. Where the taxpayer making the donation has taxable income (for 2023) over $235,675, charitable donations above the $200 threshold can receive a federal tax credit of 33%.

As a result of the two-level credit structure, the best tax result is obtained when donations made during a single calendar year are maximized. For instance, a qualifying charitable donation of $400 made in December 2023 will receive a federal credit of $88.00 ($200 times 15% plus $200 times 29%). If the same amount is donated, but the donation is split equally between December 2023 and January 2024, the total credit claimable is only $60.00 ($200 times 15% plus $200 times 15%), and the 2024 donation can’t be claimed until the 2024 return is filed in April of 2025. And, of course, the larger the donation made in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.

It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year. So, if donations made in 2023 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2018, 2019, 2020, 2021, or 2022 tax years can be carried forward and added to the total donations made in 2023, and the aggregate then claimed on the 2023 tax return.

When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high-income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses. Doing so will reduce the tax payable by that spouse and thereby minimize (or avoid) liability for the provincial high-income surtax.

Regardless of when a charitable donation is made, would-be donors are well advised to carefully consider the charities to which they donate. It’s an unfortunate reality that while most organizations seeking charitable donations are legitimate, the charitable sector attracts its share of scammers and fraudsters whose only aim is to personally profit from the generosity of others. Such charitable donation frauds arise, in particular, whenever there are world events like wars, famines, or natural disasters and people are particularly motivated to help. After every such event a flurry of “instant” charities spring to life, seeking donations which may or may not actually be used as represented. And, while some of the individuals or organizations who seek to raise funds in response to particular events may actually be well intentioned, the reality is that they are unlikely to have either the infrastructure or the experience needed to actually carry out their stated or intended aims. And others, of course, are simply scammers seeking to capitalize on the desire of Canadians to help in response to disaster.

There are two ways to ensure that one’s charitable dollar is actually utilized as intended. The first is to donate only to large international charities which have been in existence for some time and which have both expertise and experience in utilizing charitable donations in an efficient and effective way. However, where a donor is deciding whether to make a donation to a newer or less-well-known charity, it’s relatively easy to find information about that charity on the website of the Canada Revenue Agency.

Only donations made to registered charities can be claimed for purposes of the charitable donations tax credit. The Canada Revenue Agency maintains on its website a listing of all such registered charities, and that listing (which is searchable) can be found at https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en. That webpage will also provide information on the charity’s activities, including the date on which it became a registered charity, the countries in which it operates, the nature of its charitable activities, and details of its revenues and expenses, all of which can help a would-be donor to determine whether or not to make a donation.

Detailed information on calculating and claiming a charitable donations tax credit is available on the same website at Giving to charity: Information for donors – Canada.ca.

Planning for home office expense claims for 2023 (November 2023)

November 28, 2023

When the pandemic struck in March of 2020 and public health lockdowns were imposed, virtually all Canadian employees were required to work from home, most for the first time.

In the nearly four years since then, the work landscape has shifted, as many employees continue to work entirely from home, some have returned to the office full-time, and many, perhaps most, now utilize some kind of hybrid arrangement, dividing their work week between their employer’s work site and a home office.

As the necessity and availability of work-from-home arrangements changed (and changed again) over the past four years, the tax rules governing deductions which could be claimed for home office expenses changed (and changed again) to meet those realities.

Employees who work from home have always been able to claim a tax deduction for costs related to a home office. Under the tax rules in place prior to 2020, a claim for a deduction for home office expenses was available only where employees met a number of criteria and could provide the tax authorities with an itemized accounting of eligible home office expenses incurred, as well as attestation from their employer of the terms of the work-from-home arrangement – known as the “detailed” method. However, when work-from-home arrangements became essentially mandatory in 2020, the federal government greatly simplified the rules governing those claims, to provide for a temporary flat-rate method which eliminated the requirement for documentation of home office costs. That flat-rate method was available (with some variations) during 2020, 2021 and 2022, but cannot be used for home office expenses claims for 2023.

For 2023, the “detailed method” for claiming home office expenses will be the only method under which such costs may be deducted for tax purposes. What follows is a summary of the current rules outlined on the Canada Revenue Agency (CRA) website with respect to claims for home office expense deductions using the detailed method which will apply to such claims during 2023.

In order to claim a deduction for costs related to a work from home space using the detailed method, an employee must meet at least one of the following conditions.

• The employee worked from home during the year as a consequence of the pandemic (including employees who were given a choice and elected to work from home); or
• The employee was required by their employer to work from home during the year (this can be just a verbal or written agreement between employer and employee).

In addition, at least one of the following criteria must also be satisfied in order to claim work from home costs under the detailed method.

• The work at home space is where the individual mainly (more than 50% of the time) did their work for a period of at least four consecutive weeks during the year; or
• The individual uses the workspace only to earn their employment income. They must also use it on a regular and continuous basis for meeting clients, customers, or other people in the course of their employment duties.

Once these threshold criteria are met, a broad range of costs become deductible by the employee. Specifically, a salaried employee can claim and deduct the part of specified costs that relate to their work from home space, such as rent, utilities costs like electricity, heating, water (or the portion of a condo fee attributable to such utilities costs), home maintenance and minor repair costs, and internet access (but not internet connection) fees.

Once total expenses are tallied, the taxpayer must determine the percentage of those expenses which can be deducted as home office expenses, and the CRA provides detailed information on its website of how such determination is made. Generally, the employee determines that percentage based on the square footage of the workspace as a percentage of the overall square footage of the home. Where the workspace is not a separate room but is a shared space like a dining room, the employee must also calculate the number of hours for which that space is dedicated to work from home activities. Detailed information on how to make those calculations (including an online calculator) can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-22900-other-employment-expenses/work-space-home-expenses/work-space-use.html. In all cases, the CRA can ask the taxpayer to provide documentation and support for claims made using the detailed method.

There is one further requirement for employees who seek to deduct costs incurred in relation to a home office using the detailed method. Each such employee must obtain either a T2200S Declaration of Conditions of Employment for Working at Home Due to COVID-19 – Canada.ca or T2200 Declaration of Conditions of Employment – Canada.ca. On those forms, the employer must certify the work from home arrangement and confirm that the employee is required to pay their own home office expenses and is not being reimbursed for any such expenses incurred. Where there is any kind of reimbursement provided, the employer must specify the type of expense reimbursed, and the amount of reimbursement. And, of course, the employee cannot claim a deduction for any expenses for which reimbursement was received.

For the many taxpayers who were able to avail themselves of the simplified method for claiming a deduction for home office expenses in 2020, 2021, or 2022, the upcoming filing season for returns for 2023 may be the first time they encounter the rules and requirements which govern claims for home office expenses using the traditional detailed method. It would, therefore, be advisable to do some upfront planning to determine whether a deduction claim can be made for 2023 and to ensure that any record keeping needed to support that deduction is done before tax filing season arrives a few months from now.

Deadline extended for filing of underused housing tax returns for 2022

November 18, 2023

The federal government levies a 1% underused housing tax (“UHT”) on some owners of vacant or underused residential properties in Canada. Generally, affected property owners are foreign nationals, or Canadian citizens or permanent residents who own residential property as a member of a partnership or as a trustee, or corporations which are incorporated outside of Canada.

Property owners who own an affected property at the end of the calendar year must file a return and pay any tax owing for each such property on or before the following April 30. The Canada Revenue Agency (“CRA”), however, recently announced that the deadline for filing such returns for the 2022 calendar year has been extended to April 30, 2024. Consequently, affected owners of residential property in Canada must file a separate UHT return by April 30, 2024, for each property owned on December 31 of the 2022 and 2023 calendar years, in order to avoid penalties and interest.

The news release announcing the extension can be found on the CRA website at Government of Canada extends deadline for homeowners to file their Underused Housing Tax return – Canada.ca, and detailed information on the tax itself is available on the same website at Who must file a return and pay the tax – Underused Housing Tax (UHT) – Canada.ca.

CRA announces Canada Pension Plan contribution amounts for 2024

November 10, 2023

The Canada Revenue Agency (CRA) has announced the contribution percentages, limits, and amounts which will apply for purposes of the Canada Pension Plan (CPP) during 2024. Those figures include changes which will create a second level of contributions for higher income individuals.

First level (CPP1) contributions will be made by individuals earning between $3,500 and $68,500. Employee and employer CPP1 contribution rates for 2024 remain at 5.95%, and the maximum contribution will be $3,867.50 for each of the employer and employee. The contribution rate for self employed individuals, who pay both the employer and employee contributions, will remain at 11.90%, and the maximum contribution will be $7,735.00.

Second level (or CPP2) contributions will be made by individuals on income for the year between $68,500 and $73,200. Employee and employer CPP2 contribution rates for 2024 will be 4.00%, and the maximum contribution will be $188.00 each. As is the case with CPP1 contributions, self-employed individuals will pay both the employer and employee contributions, meaning that they will pay 8.00% of income between $68,500 and $73,200, or a maximum CPP2 contribution of $376.00.

Details of the contribution structure and amounts for 2024 are outlined in a CRA Tax Tip, which can be found on the Agency’s website at https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2023/maximum-pensionable-earnings-contributions-2024.html.

Temporary exemption from carbon tax on purchases of home heating oil

November 4, 2023

The federal government has announced that sales of home heating oil delivered between November 9, 2023 and April 1, 2027 will be exempt from the federal carbon tax.

In the same announcement, the federal government indicated that a $250 incentive payment would be provided to low- and median-income households that switch their heating source from heating oil to heat pumps. Average cost heat pumps will also be provided free of charge to low- to median-income Canadian households in provinces and territories that have agreed to support the delivery of the federal Oil to Heat Pump Affordability grants, which will be increased from $10,000 to $15,000.

Details of the new measures are outlined in a Backgrounder which can be found on the Finance Canada website at https://www.canada.ca/en/department-finance/news/2023/10/lowering-energy-bills-for-canadians-across-the-country.html.

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