Blogs and Posts

Coming clean with the tax authorities – the Voluntary Disclosure Program (September 2023)

September 27, 2023

The Canadian tax system is a “self-assessing system” which relies heavily on the voluntary co-operation of taxpayers. Canadians are expected (in fact, in most cases, required) to complete and file a tax return each spring, reporting income from all sources, calculating the amount of tax owed, and remitting that amount to the federal government on or before April 30. And while it’s doubtful that anyone does so with any great degree of enthusiasm, each spring tens of millions of Canadians do sit down to complete that return (or, more often, they pay someone else to do it for them).

Whether they do it themselves or have the return prepared for them, the rate of compliance among Canadian taxpayers is very high – between February 6 and August 27, 2023, just under 31 million individual income tax returns were filed with the Canada Revenue Agency. Inevitably, however, there are those who do not meet their filing or payment obligations.

There are a lot of reasons why some Canadians don’t file their returns, or don’t file returns which are accurate and complete, or don’t pay their taxes on a timely basis. Sometimes, that failure to timely file is based on a lack of understanding of how our tax system works, or on incorrect information about that system. In other instances, taxpayers simply don’t have the funds needed to pay the amount of tax owing and decide (incorrectly) that if they can’t pay their tax bill, in whole or in part, the best course of action is to not file a return. Finally, each year there are some Canadians who file returns in which (inadvertently or purposefully) income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed.

While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate, isn’t high, there are a lot of such returns when measured by absolute numbers. And although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover that amount.

With all of that in mind, several years ago the Canada Revenue Agency (CRA) instituted a program – the Voluntary Disclosure Program (VDP) – intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arises from the fact that, in most cases, while taxpayers who participate in the VDP program have to pay outstanding tax amounts owed, plus some interest, they can avoid some other interest charges, some penalties which would normally be imposed, and the risk of criminal prosecution.

To qualify for relief under the VDP, an application made with respect to non-compliance with income tax filing and payment obligations must:

• be voluntary (meaning that it is done before the CRA initiates any enforcement action related to the information to be disclosed);
• be complete;
• involve the application or potential application of a penalty;
• include information that is at least one year past due; and
• include payment of the estimated tax owing.

The VDP program includes two separate “tracks” for income tax disclosures – the Limited Program and the General Program – and the kind and extent of relief available depends on the track to which a particular application is assigned.

While the CRA will ultimately make the determination of whether an application should proceed under the Limited or the General Program on a case-by-case basis, there are guidelines in place. The CRA’s intention is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional (as distinct from inadvertent) conduct on the part of the taxpayer or a degree of carelessness which amounts to gross negligence. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

• the dollar amounts involved;
• the number of years of non-compliance;
• the sophistication of the taxpayer;
• how quickly the taxpayer acted to correct their non-compliance after becoming aware of it;
• whether there has been deliberate or wilful default or carelessness amounting to gross negligence on the part of the taxpayer; and
• whether the disclosure was made after the taxpayer became aware of the CRA’s intended specific focus on that particular area of taxpayer compliance.

Those whose applications are accepted under the Limited Program will be required to pay outstanding tax balances owed, plus interest, and will be subject to penalties. They will not, however, be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of non-compliance – that is, for the years preceding the three most recent years of returns required to be filed. For example, a taxpayer who makes an application to the VDP and who has failed to file returns for the 2016 through 2021 taxation years may be provided with interest relief with respect to taxes owed for the 2016, 2017, and 2018 taxation years. Such relief is generally equal to 50% of interest owed – in other words, the taxpayer will be required to pay only half of the interest charges which would otherwise be levied for those years. No interest relief will, however, be provided on tax amounts owed for the three most recent (2019, 2020, and 2021) taxation years. Since interest charges levied by the CRA are, by law, higher than current commercial rates (for instance, the rate levied for the third quarter of 2023 is 9%) and interest charged is compounded daily, having interest amounts forgiven, even in part, can make a significant difference to the overall tax bill faced by the taxpayer.

In order to benefit from the VDP, taxpayers must first make an application to the Program. That application must include payment of the estimated taxes owing, as a condition of participation in the VDP. Where a taxpayer is financially unable to make that tax payment, he or she can request that the CRA consider a payment arrangement.

The decision to apply to the VDP and to “come clean” about all previous tax transgressions is something that most taxpayers will likely consider with considerable trepidation. Those who are unsure about whether they want to move forward with a VDP application have the option of using the CRA’s “pre-disclosure discussion service”. As the name implies, that service allows taxpayers to participate in preliminary discussions with a CRA official, on an anonymous basis, to gain some knowledge about the VDP program, the process involved, and the potential relief available.

Taxpayers who decided to move forward with an application to the VDP can complete a Form RC199 Voluntary Disclosures Program Application, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc199.html. Once the application is received, the CRA will check to make certain that the applicant is eligible to apply and that all of the required information and documentation and the payment have been sent. The next step is for the CRA to evaluate the application to ensure that the criteria for participation in the VDP are satisfied and, if so, to determine the program (Limited or General) to which the application should be assigned, and the taxation year(s) for which relief is being considered. At each step the taxpayer will be provided with written notice of the CRA’s decisions. The CRA’s advice is that taxpayers should contact them (for individual taxpayers, by calling the Individual Income Tax Enquiries line at 1-800-959-8281) if more than five weeks have passed since the application was submitted and no response has yet been received.

If the decision made is that the application is not eligible for the VDP, the taxpayer will also be advised in writing, with reasons, of the CRA’s decision to deny the application.

Where the decision made by the Agency is one with which the taxpayer does not agree, they are entitled to ask for a second review of the application. If that decision is also unfavourable, it is possible for a taxpayer to ask the Federal Court to review the decision and to direct the CRA to re-consider the VDP application. However, a taxpayer who wishes to pursue his or her application to the extent of filing such a Federal Court application is well advised to obtain legal advice before doing so.

Finally, taxpayers should recognize that the VDP Program can’t be used as a kind of “get out of jail free card” with respect to repeated failures to meet tax filing and payment obligations. The CRA website makes it clear that the Agency expects taxpayers who have benefitted from the VDP to thereafter meet their tax obligations, and a second review will be provided for the same taxpayer only in situations where the second application relates to a different matter than the first, and where the circumstances giving rise to the second application were beyond the taxpayer’s control.

Detailed information on the VDP program can be found on the CRA website at: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html.

Deciding when to start receiving Old Age Security benefits (September 2023)

September 27, 2023

The Old Age Security (OAS) program is the only aspect of Canada’s retirement income system which does not require a direct contribution from recipients of program benefits. Rather, the OAS program is funded through general tax revenues, and eligibility to receive OAS is based solely on Canadian residency. Anyone who is 65 years of age or older and has lived in Canada for at least 40 years after the age of 18 is eligible to receive the maximum benefit. For the third quarter of 2023 (July to September), that maximum monthly benefit for recipients under the age of 75 is $698.60, while benefit recipients aged 75 and older can receive up to $768.46 per month. The monthly benefit for all recipients will increase by 1.3% during the fourth quarter (October to December) of 2023. 

For many years, OAS was automatically paid to eligible recipients once they reached the age of 65. For the past decade, however, Canadians who are eligible to receive OAS benefits have been able to defer receipt of those benefits for up to five years, when they turn 70 years of age. For each month that an individual Canadian defers receipt of those benefits, the amount of benefit eventually received increases by 0.6%. The longer the period of deferral, the greater the amount of monthly benefit eventually received. Where receipt of OAS benefits is deferred for a full 5 years, until age 70, the monthly benefit received is increased by 36%.

It can, however, be difficult to determine, on an individual basis, whether and to what extent it would make sense to defer receipt of OAS benefits. Some of the difficulty in deciding whether to defer – and for how long – lies in the fact there are no hard and fast rules, and the decision is very much an individual one. Fortunately, however, there are a number of factors which each individual can consider when making that decision.

The first such factor is how much total income will be required, at the age of 65, to finance current needs. It’s also necessary to determine what other sources of income (employment income from full- or part-time work, Canada Pension Plan retirement benefits, employer-sponsored pension plan benefits, annuity payments, and withdrawals from registered retirement savings plans (RRSPs) and registered retirement income fund (RRIFs)) are available to meet those needs, both currently and in the future, and when receipt of those income amounts can or will commence or cease. Once income needs and the sources and possible timing of each is clear, it’s necessary to consider the income tax implications of the structuring and timing of those sources of income. The ultimate goal, as it is at any age, is to ensure sufficient income to finance a comfortable lifestyle while at the same time minimizing both the tax bite and the potential loss of tax credits.

In making those calculations, the following income tax thresholds and benefit cut-off figures are a starting point.

• Income in the first federal tax bracket is taxed at 15%, while income in the second bracket is taxed at 20.5%. For 2023, that second income tax bracket begins when taxable income reaches $53,359.
• The Canadian tax system provides (for 2023) a non-refundable tax credit of $8,396 for taxpayers who are age 65 or older at the end of the tax year. The amount of that credit is reduced once the taxpayer’s net income for the year exceeds $42,335.
• Individuals can receive a GST/HST refundable tax credit, which is paid quarterly. For 2023, the full credit is payable to individual taxpayers whose family net income is less than $42,335.
• Taxpayers who receive Old Age Security benefits and have income over a specified amount are required to repay a portion of those benefits, through a mechanism known as the “OAS recovery tax”, or clawback. Taxpayers whose income for 2023 is more than $86,912 will have a portion of their future OAS benefits “clawed back”.

What other sources of income are currently available?

More and more, Canadians are not automatically leaving the work force at the age of 65. Those who continue to work at paid employment and whose employment income is sufficient to finance their chosen lifestyle may well prefer to defer receipt of OAS. Similarly, a taxpayer who begins receiving benefits from an employer’s pension plan when they turn 65 may be able to postpone receipt of OAS benefits.

Is the taxpayer eligible for Canada Pension Plan retirement benefits, and at what age will those benefits commence?

Nearly all Canadians who were employed or self-employed after the age of 18 paid into the Canada Pension Plan and are eligible to receive CPP retirement benefits. While such retirement benefits can be received as early as age 60, receipt can also be deferred and received any time up to the age of 70. As is the case with OAS benefits, CPP retirement benefits increase with each month that receipt of those benefits is deferred. Taxpayers who are eligible for both OAS and CPP will need to consider the impact of accelerating or deferring the receipt of each benefit in structuring retirement income.

Does the taxpayer have private retirement savings through an RRSP?

Taxpayers who were not members of an employer-sponsored pension plan during their working lives generally save for retirement through a registered retirement savings plan (RRSP). While taxpayers can choose to withdraw amounts from such plans at any age, they are required to collapse their RRSPs by the end of the year in which they turn 71, and to begin receiving income from those savings. There are a number of options available for structuring that income, and, whatever the chosen option (usually, converting the RRSP into a registered retirement income fund or RRIF, or purchasing an annuity), it will mean that the taxpayer will begin receiving income amounts from those RRSP funds in the following year. Taxpayers who have significant retirement savings in RRSPs should, in determining when to begin receiving OAS benefits, consider that they will have an additional (taxable) income amount for each year after they turn 71.

The ability to defer receipt of OAS benefits does provide Canadians with more flexibility when it comes to structuring retirement income. The price of that flexibility is increased complexity, particularly where, as is the case for most retirees, multiple sources of income and the timing and taxation of each of those income sources must be considered, and none can be considered in isolation from the others.

Individuals who are facing that decision-making process will find some assistance on the Service Canada website. That website provides a Retirement Income Calculator, which, based on information input by the user, will calculate the amount of OAS which would be payable at different ages. The calculator will also determine, based on current RRSP savings, the monthly income amount which those RRSP funds will provide during retirement. To use the calculator, it is necessary to know the amount of Canada Pension Plan benefit which will be received; the taxpayer can obtain that information by calling Service Canada at 1-800 277-9914.

The Retirement Income Calculator can be found at: https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html.

Changes to Registered Education Savings Plans for the upcoming school year (September 2023)

September 27, 2023

By anyone’s measure, obtaining a post-secondary education is an expensive undertaking. Tuition and other school-related costs are just the start of the bills which must be paid. Whether the student obtains a place in a university residence or finds a place to live off campus, students (and their parents) must also budget for the cost of residence and meal plan fees, or rent and groceries. The total cost of a single year of university or college attendance away from home can easily reach $30,000 – and can significantly exceed that amount where the student is enrolled in a specialized academic program leading to a professional designation.

Adding to the financial hit, government support for post-secondary education through our tax system has been cut back in recent years. While students can still claim a tax credit for the cost of tuition, two other related tax credits – the education tax credit and the textbook tax credit – were eliminated by both the federal government and several of the provinces in recent years.

While there are still government-sponsored loan and grant programs which post-secondary students can access, the reality is that most families will shoulder the main financial burden of post-secondary education for their children. And many families do so through a Registered Education Savings Plan, or RESP.

An RESP enables parents (or grandparents) to save for a child or grandchild’s post-secondary education on a tax-assisted basis. While parents or grandparents who contribute to an RESP cannot deduct contributions made from income, investment income earned by those contributed funds is not taxed as it is earned. And, where RESP contributions start early, those funds can compound, through untaxed investment earnings, for more than a decade.

The other significant tax benefit of an RESP comes into play when the beneficiary, now a student enrolled in post-secondary education, withdraws funds to pay for his or her education. All such qualifying withdrawals made, whether of original contributions or investment income earned, are taxed in the hands of the student beneficiary. And, because most students have little or no income, it’s often the case that no tax is payable on amounts withdrawn.

A change announced in the 2023-24 federal budget will enhance the available tax savings. The amount which a student can withdraw from an RESP is subject to limits and, as noted in the budget, those limits have not changed in 25 years, clearly not keeping pace with increases in either the cost of living or the cost of post-secondary education.

To address that gap, the amount which a student can withdraw from an RESP has been increased, effective as of the budget date of March 28, 2023. Those changes are as follows:

• Students who are enrolled full-time (defined as a program lasting at least three weeks and requiring at least 10 hours per week of courses or other program work) can now withdraw up to $8,000 in respect of the first 13 consecutive weeks of enrollment in a 12-month period. (The previous limit was $5,000.)
• Students who are enrolled part-time (defined as a program lasting at least three consecutive weeks and requiring at least 12 hours per month of courses in the program) can now withdraw up to $4,000 per 13-week period. (The previous limit was $2,500.)

The tax impact of the change can mean that a post-secondary student who lives at home during the summer, is able to find full-time employment at minimum wage during that time, and who withdraws the full $8,000 from his or her RESP, could cover about half the costs to be incurred for the upcoming school year out of income on which no federal tax is payable.

Assume that such a student is paid $15.00 per hour, working 35 hours a week for the 16 weeks between academic years. That work will generate $8,400 in income. The RESP withdrawal of $8,000 will bring the student’s total income for the year to $16,400. For federal tax purposes, every taxpayer can earn up to $13,521 (for 2023) in annual income before any federal tax is payable. The student can, as well, claim a federal tax credit for tuition amounts paid, which will eliminate federal tax on the remaining $2,879 of income.

Despite the best efforts of students and their parents to save for post-secondary education and to offset the costs of that education through summer jobs, the reality is that most post-secondary students do have to borrow money at some point during their post-secondary education years. The lowest-cost source of such borrowing is government student loan programs, and changes which take effect as of the 2023-24 academic year have also been made with respect to such borrowings.

All Canada Student Loan (CSL) borrowings are subject to a weekly limit and where a student borrows funds through the CSL program, no repayment of those borrowings is required until six months after the student graduates. As announced in this year’s federal budget, and effective as of August 1, 2023, the limit on borrowings through the Canada Student Loan program was increased from $210 to $300 per week of study. Finally, effective as of April 1, 2023, all loans received through the CSL program are interest free.

More information on the budgetary changes to the Canada Student Loan program and on changes to the rules governing Registered Education Savings Plans can be found on the federal government website at https://www.canada.ca/en/employment-social-development/corporate/notices/budget-student-aid.html and at https://www.budget.canada.ca/2023/report-rapport/tm-mf-en.html#a3.

Repayment deadline extended for small business pandemic loans

September 23, 2023

During the pandemic, the federal government provided the small business sector with financial assistance through the Canada Emergency Business Account (CEBA) program. That program provided eligible small businesses with loans of up to $60,000.

Program terms provided that where such loans were repaid by December 31, 2023, up to 33% of loan amounts could be forgiven. The federal government recently announced that such repayment deadline would be extended by a few weeks, and that the new deadline will be January 18, 2024. As of January 19, 2024, outstanding loans will convert to three-year term loans, subject to interest of five per cent per annum, with the term loan repayment date extended by an additional year from December 31, 2025 to December 31, 2026.

Details of the repayment requirements and new deadlines are outlined in the federal government announcement of the extension, which can be found at https://www.canada.ca/en/department-finance/news/2023/09/canada-emergency-business-account-government-extends-repayment-and-partial-loan-forgiveness-deadlines.html.

Third individual instalment payment of 2023 due September 15

September 9, 2023

Individual Canadian taxpayers who pay federal income tax by instalments make those instalment payments of tax four times each year, by specified deadlines.

The third income tax instalment deadline for the 2023 tax year falls on Friday, September 15. Information on the instalment payment program, available options with respect to determining the amount of instalment payment to be made, and methods for making an instalment payment can be found on the Canada Revenue Agency website at https://www.canada.ca/en/revenue-agency/services/payments-cra/individual-payments/income-tax-instalments.html.

Increase in withdrawal limits for Registered Education Savings Plans

September 1, 2023

Canadian parents can save for their children’s post-secondary education on a tax-assisted basis, through the federal Registered Education Savings Plan (RESP) program, which allows parents to contribute up to $50,000 per child beneficiary to an RESP. Once the beneficiary of an RESP enrols in post-secondary education, he or she can withdraw amounts from the plan, and such withdrawals are taxed in the hands of the student beneficiary. Since many students have little or no other income, they can usually withdraw the money tax-free.

In this year’s budget, the federal government announced that the amount which a beneficiary can withdraw from his or her RESP once enrolled in post-secondary education would be increased. Effective as of March 28, 2023, that amount is increased to $8,000 (from $5,000) for full-time students and to $4,000 (from $2,500) for part-time students.

Detailed information on RESPs can be found on the Canada Revenue Agency website at https://www.canada.ca/en/services/benefits/education/education-savings.html, and the budget announcement of the increased withdrawal limits is available on the Finance Canada site at Chapter 1: Making Life More Affordable and Supporting the Middle Class | Budget 2023 (canada.ca).

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