New businesses and GST/HST registration (August 2014)

Virtually all businesses in Canada which sell goods or services must collect goods and services tax (GST) or harmonized sales tax (HST) from purchasers of those goods and services. However, an exemption is provided for businesses whose taxable sales for a single quarter or over the previous four quarters total less than $30,000. Such businesses are known as “small suppliers”, and they are not obligated to register for GST/HST purposes. Such businesses may, however, register voluntarily, in order to be able to claim input tax credits on the GST/HST they pay on their own purchases. Where such voluntary registration is done, the business must then remit GST/HST amounts collected on its own sales of goods and services to the federal government. Details of the GST/HST remittance and filing obligations imposed on Canadian businesses can be found on the CRA website at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/menu-eng.html.

[efaccordion id=”01″] [efitems title=”Read More…” text=”However, once taxable sales of a business in a single quarter or over the previous four quarters reach the $30,000 threshold, registration for GST/HST purposes becomes mandatory. A gap in the law, however, has meant that businesses which did not register as required could not be compelled to do so.

That gap was closed by a measure announced in this year’s federal Budget. The new rule gives the Minister of National Revenue the discretionary authority to register and assign a GST/HST registration number where a person fails to comply with the requirement to register, even after receiving notification of that requirement from the Minister.

The Canada Revenue Agency (CRA) intends to administer the new provision, in the first instance, on a reminder basis. Businesses which are non-compliant will be contacted by the CRA on an informal basis and reminded of their obligation to register. Where registration does not take place, the CRA will then issue a formal notification indicating that the person will be registered for GST purposes effective 60 days from the date of the formal notice.
Once a business is registered for GST/HST purposes, certain obligations follow, whether the registration is done voluntarily or by the Minister as the result of a business’s failure to register. Businesses which are registered for GST/HST purposes must charge and collect GST/HST from their customers or clients, and must remit the required GST/HST amounts to the federal government, together with a GST/HST return, on a prescribed schedule.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.”][/efaccordion]

The medical expense tax credit and out-of-country costs (August 2014)

Canadians benefit from a health care system in which the cost of health care is paid out of public funds and the standard of care is equal to any in the world. While in other countries the cost of treatment for a major illness can literally push an individual or family into bankruptcy, Canadians can be assured that getting good medical treatment in Canada does not depend on having the money to pay for such treatment.

[efaccordion id=”01″] [efitems title=”Read More…” text=”The Canadian medical system does, however, have its weaknesses, and chief among them is the time it can take to get treatment in non-emergency situations. Everyone has heard stories of, or has personally experienced, waits of weeks or months to see a specialist, to undergo some types of surgeries, or even to have diagnostic procedures carried out.

Many Canadians who are unwilling to wait for those weeks or months and who have the necessary financial resources have opted to travel to another country—usually the United States—to have such procedures done, and to pay for them out of their own pocket. While paying out of pocket for the cost of a major procedure like open heart surgery is beyond the resources of all but a few Canadians, paying for less invasive procedures—like an MRI—isn’t. As well, some countries have become destinations for what is termed “medical tourism” by setting up facilities in which particular kinds of specialist medical treatment can be obtained.

The Canada Revenue Agency (CRA) was asked recently about the availability of a claim for the medical expense tax credit (METC) for costs incurred for out-of-country medical care. The METC allows a taxpayer to claim a non-refundable federal credit of 15% of the cost of qualifying medical expenses, to the extent that such expenses incurred in a 12-month period ending in 2014 exceed 3% of the taxpayer’s net income, or $2,171, whichever is less. So, a taxpayer whose net income for 2014 is $50,000 can claim any qualifying medical expenses over $1,500 (3% of $50,000). A parallel provincial credit for the same medical expenses can also be claimed, with the percentage credit based on the province in which the taxpayer lives and files a tax return.

The answer provided by the CRA to the query about whether and to what extent an METC can be claimed for out-of-country medical expenses isn’t what some might expect. Essentially, the CRA’s position is that for purposes of the METC, a medical expense receives the same tax treatment, whether it is incurred in Canada, the United States, or some other more remote destination. In the CRA’s words any expense meeting the required conditions to qualify as an eligible medical expense … will not be disqualified for the sole reason that it was incurred outside Canada.

The particular question put to the CRA was with respect to costs incurred by an individual to travel to another country in order to have back surgery. That surgery was recommended by a specialist within Canada but the specialist was too busy to perform the surgery personally. So the individual, accompanied by his wife, took a flight to another country, where the surgery was carried out in a hospital. The individual and his wife stayed at a nearby hotel during a recuperation period. All of the costs involved for travel, surgery, the hospital stay, and accommodations for the taxpayer and his wife were paid out-of-pocket, with no reimbursement from an employer, an insurance plan, or a provincial government.

In providing its opinion on whether each of the types of costs incurred was eligible for the METC, the CRA assessed each in light of the rules which would apply for the same expenses incurred in Canada, and reached the following conclusions.
Amounts paid to a medical practitioner in the foreign country and to the hospital were qualifying medical expenses for purposes of the METC. The only stipulation made by the CRA was that the hospital to which the monies were paid must have been a public or licensed private hospital, and that amounts paid were for medical services.

The cost of the return flight taken by the individual would be eligible for the METC if the cost was paid to someone in the business of providing transportation services, the distance travelled by the individual was at least 40 kilometres by a reasonably direct travel route, substantially equivalent medical services were unavailable within the individual’s locality and, finally, it was reasonable for the individual to travel to the other location to obtain medical services. The cost of the wife’s flight would qualify if a medical practitioner certified that the individual could not travel alone.

Travel expenses other than the cost of the flight—including costs incurred by the individual for meals, accommodation, gasoline, and parking—qualified as medical expenses if individual was travelling at least 80 kilometres to obtain medical treatment and the other criteria outlined above were also met. As with the cost of the flight, other travel expenses incurred by the individual’s spouse could also qualify for the METC if a medical practitioner certified that the individual could not travel alone.
Nobody wants to get sick, especially in situations where one has to incur out-of-pocket expenses in order to receive medical care in a timely way. The unfortunate reality of the current state of the Canadian medical system is, however, that it can take a long time to obtain diagnosis and/or treatment for symptoms or conditions which are not considered urgent—and, perhaps, even for some that are. Canadians who make the difficult and sometimes costly decision to seek more timely medical care out-of-country can at least be assured that, assuming the usual criteria are met, the costs of obtaining that care may be offset to some degree by our tax system.

Federal government tightens mortgage lending rules—again (August 2014)

Canada’s mortgage lending rules (and banking practices in general) have always been more stringent and conservative that those which prevail in the United States. In large part because of that, Canada was spared the lending crisis which took place in the U.S. in 2007-2008, after a significant number of ill-advised sub-prime mortgages went into default and eventual foreclosure.

[efaccordion id=”01″] [efitems title=”Read More…” text=”While mortgage lending practices in Canada during that time never approached the level of recklessness seen in the U.S., the Canadian government nonetheless perceived a need to put a halt to some practices which it viewed as creating potential risks to the overall market. In all, the federal government has moved several times since 2008 to make changes which require higher down payments and reduce both the maximum mortgage amortization period and the percentage of total income which new homeowners could spend on housing costs.

The latest such set of changes was announced earlier this year, and came into effect on May 30, 2014. All of the changes related to mortgages insured by the Canada Mortgage and Housing Corporation (CMHC).
Canadian law requires any would-be homeowner who purchases a home with a down payment of less than 20 percent of the purchase price to obtain mortgage insurance through CMHC. Essentially that insurance, for which the premiums are paid by the homeowner, protects the mortgage lender against the risk that the homeowner will default on the mortgage. And, because CMHC is a federal Crown corporation, the federal government is ultimately responsible for any obligations undertaken by CMHC.

This most recent set of changes will affect property purchases by self-employed Canadians and purchases of second properties by all Canadians, self-employed or otherwise. The affected types of properties or borrowers are as follows.

Purchases of a second property

At first glance, it would seem that instances in which an individual would be purchasing a second property aren’t all that common. But there are in fact a number of circumstances in which such purchases by individuals or families can make sense. The first one that comes to mind, of course, is the purchase of a cottage or other type of recreational property. In other cases, parents who have children attending an out-of-town university or college may decide that it makes more financial and economic sense to purchase a condo or house in the town or city where the university is located. At current interest rates, the cost of carrying the mortgage on that property can be less than the cost of fees for a university residence (especially for more than one child). Owning a property in the university or college town also eliminates the aggravation and cost of finding and renting a series of apartments or houses for four or more years. And, parents who opt for purchasing rather than renting can ultimately benefit from the increase in value of the property over the period of ownership. Finally, it’s not that rare for a couple or family who live in one city or in the suburbs to maintain a small condo in another city, for either work or recreational purposes.
The new rule, effective May 30, 2014, provides that where an individual borrower (or co-borrower) is purchasing a second property, CMHC will not provide insurance for that property where such insurance is already in place on the borrower or co-borrower’s first property. Borrowers who have a mortgage on their first property which is not CMHC-insured (or who have no mortgage at all) will still be able to obtain CMHC insurance on the purchase of their second property, assuming all other criteria are met. Essentially, CMHC is minimizing its exposure by no longer providing mortgage default insurance on two properties owned at the same time by the same borrower.

It’s also not uncommon today for parents to act as co-signers for their children, usually on the purchase of a first home. The fact that the new rule also applies to co-borrowers will mean that parents whose own home has a CMHC-insured mortgage will not be able to act as co-signers for their children who are purchasing a property which also requires CMHC insurance.

Self-employed home purchasers

It’s always been more difficult for those who are self-employed to obtain credit of any kind. Generally, more proof of income is asked for, interest rates may be higher or a guarantor may be required.
CMHC will continue to provide insurance for self-employed individuals who want to purchase a home, but it will no longer be willing to accept the individual’s own estimate or assessment of his or her income. Rather, such individuals may obtain CMHC insurance on their home purchase only where their income is formally validated by a third party. Generally, this will mean providing copies of the individual’s Notice of Assessment or business financial statements for the two year period preceding the date of purchase.

It’s likely that those affected by this latest set of changes to mortgage lending rules won’t be happy about the new restrictions. Notwithstanding, these are unlikely to be the last such changes announced by the federal government, which has shown that it will not hesitate to impose new rules where it believes that existing practices may create an unacceptable level of risk to the Canadian real estate and lending market as a whole.

Minimizing the cost of post-secondary education (August 2014)

As summer starts winding down, post-secondary students will start thinking about choosing courses and finding a place to live during the coming academic year. Their parents’ attention will more likely be focused on the cost of that year, and the upcoming deadlines for payment of first semester tuition and housing costs.

[efaccordion id=”01″] [efitems title=”Read More…” text=”Whether a student attends college or university, post-secondary education is expensive. Even those who cut costs as much as possible by living at home during their college or university years must still spend thousands of dollars on tuition fees and required textbooks. Where a student lives away from home, whether in residence or in rental housing off-campus, it’s realistic to budget a minimum of $15,000 annually for the combined cost of school and living expenses.

Fortunately for all concerned, the cost of post-secondary education can be offset somewhat by claiming the various tax credits which are provided through our tax system. At the federal level, a non-refundable tax credit equal to 15% of qualifying costs can be claimed by the student. A parallel credit is claimable at the provincial or territorial level, with the available percentage credit varying, depending on the province or territory in which the student lives and files an income tax return.
First, the bad news: although living costs—the cost of living in a student residence and purchasing a meal plan, or the cost of renting off-campus—is often the largest single annual expense incurred by post-secondary students, there is no tax credit or deduction available to help mitigate those living expenses. Since the student would have to have incurred costs for shelter and food in any case, such expenses are viewed as personal expenses unrelated to the student’s education and therefore not eligible for credit or deduction.

The good news, however, is that a non-refundable tax credit can be claimed for virtually all other education-related costs, including tuition, books, and most ancillary expenses—(e.g., examination fees or mandatory computer service fees which are levied as part of a student’s tuition). And, where a student can’t make use of the full credit available, that credit can usually be transferred to, and claimed by, a spouse, parent, or grandparent.

After the cost of food and shelter, the largest expense faced by post-secondary students is the cost of tuition, which can range from $4,000 a year to over $15,000. No matter what the amount, students are entitled to a non-refundable federal tax credit equal to 15% of their tuition bill. A parallel provincial or territorial credit can also be claimed, with the percentage credit ranging, in 2014, from 5.05% to 11.0%.

Both full and part-time university students can also claim the “education tax credit”, which is calculated as a fixed amount for every month of full or part-time attendance during the tax year. For 2014, the full time amount to be claimed on the federal tax return is $400 per month, while the part-time amount is $120 per month. The total amount claimed is then multiplied by 15% to arrive at the credit claimed on the federal tax return. As with the tuition tax credit, the provinces all offer an education tax credit, with both the amount and the conversion percentage varying by province.

The final “standard” deduction available to post-secondary students is the so-called “textbook amount”. The name is somewhat misleading, as neither eligibility for nor the amount of the credit depends on expenditures made for textbooks. Rather, the federal textbook amount is a fixed monthly amount (currently $65 for full-time and $20 for part-time students) which, like the tuition and education amounts is converted to a credit by multiplying by 15%, and which can be claimed by any student who is eligible for the education amount.

Non-refundable tax credits, like the tuition, education, and textbook credits outlined above, work by reducing the tax which the individual claiming the credits would otherwise have to pay. However, post-secondary students generally have relatively low income and consequently relatively low tax bills and so may not be able to “use up” all of their available credits in a single tax year. Two solutions are possible. First, the student may transfer the unused credit to a spouse, parent, or grandparent (and it’s not necessary for the parent or grandparent to have actually paid the tuition bill in order to claim the transferred credit). Second, the student can keep the excess credit and claim it in any future tax year, when income and therefore the resulting tax payable will presumably be higher. There are some restrictions and limitations on the transfer of student tax credits, but generally speaking, most students should be able to transfer credits to parents or grandparents without difficulty.

No matter how diligently parents save for a child’s post-secondary education or how lucrative a student’s summer jobs are, today’s reality is that most students will have incurred some debt to pay the cost of post-secondary education—sometimes a lot of debt. Where that debt is in the form of government-sponsored student loans (generally, loans provided under the Canada Student Loans program or the equivalent provincial program), interest paid on those loans after graduation can qualify for a tax credit, at both the federal and provincial levels. It is important to remember, however, that only interest paid on loans extended under government-sponsored programs qualifies for the credit. Loans provided by private lenders (for example, through a student line of credit) do not qualify, and interest paid on any consolidated loans which include funds advanced by private-sector lenders will similarly not be eligible for the credit. In today’s low interest rate environment, a financial institution may offer (usually at the time repayment of government student loans must begin) to consolidate all of a student’s outstanding debt at a preferential interest rate. Post-secondary graduates should consider such offers carefully, as any mingling of government student loan balances with private sector lending will disqualify the student from claiming a tax credit for interest paid on that government student loan.

While the long-term benefits are undeniable, obtaining a post-secondary education never has been and likely never will be an inexpensive proposition. The costs involved, can, however, be kept to the minimum possible by ensuring that every tax “break” available, during both the post-secondary years and thereafter, is claimed in the most tax-efficient way possible.

News Letters

New businesses and GST/HST registration (August 2014)

The medical expense tax credit and out-of-country costs (August 2014)

Federal government tightens mortgage lending rules—again (August 2014)

Purchases of a second property

Self-employed home purchasers

Minimizing the cost of post-secondary education (August 2014)

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