Getting a post-secondary education – or professional training – isn’t inexpensive. Tuition costs can range from as little as $5,000 per year for undergraduate studies to as much as $40,000 in tuition for a year of professional education. And those costs don’t factor in necessary expenditures on textbooks and other ancillary costs, to say nothing of general living expenses, like rent, transportation and food.

Getting a post-secondary education – or professional training – isn’t inexpensive. Tuition costs can range from as little as $5,000 per year for undergraduate studies to as much as $40,000 in tuition for a year of professional education. And those costs don’t factor in necessary expenditures on textbooks and other ancillary costs, to say nothing of general living expenses, like rent, transportation and food.

What that means, in most cases, is that Canadians who want to pursue post-secondary education must go into debt to do so. Financing through a bank loan or line of credit is possible, but most students who need financial assistance receive that assistance through a federal government program – the Canada Student Loan (CSL) program – as well as loan or grant programs provided by the particular province or territory in which the student resides.

Using a government-sponsored loan program to finance education has a number of advantages. Under the CSL program, any loans provided do not accrue interest while the recipient student is still in school and no repayment of the loan is required during that time. However, interest starts accruing once the student has graduated and, six months after graduation, those who received loans under the CSL program are required to make arrangements for repayment. Consequently, CSL loan recipients who graduated in the spring of 2018 must now consider what arrangements they wish to make for repayment of loan amounts received.

The onus is on the loan recipient to contact the CSL center to make required arrangements for repayment, and failing to do so will not delay repayment. In such cases, the federal government, as the loan issuer, has the right to automatically withdraw loan repayments from the same bank account where the loans were originally deposited.

Loan recipients can choose between a fixed interest rate on their loan (meaning that the interest rate stays the same until the loan is fully repaid) or a variable/floating rate of interest, which will change with changes in the prime rate.

Current rules provide the following rates for Canada Student Loans issued on or after August 1, 1995:

• the fixed interest rate is prime plus 5%;
• the floating interest rate is prime plus 2.5%.

The choice of whether to select a fixed or floating interest rate is, obviously, an individual one, which must take into account the size of the loan, the time period over which the borrower expects to make full repayment and, of course, one’s views on whether interest rates will be rising or falling over that expected repayment period.

Whatever the interest rate chosen or levied, borrowers who pay that interest can claim a federal and provincial/territorial tax credit to help offset those costs. The student loan interest tax credit is a non-refundable credit, meaning that it applies to reduce any federal tax payable, but cannot create or increase a refund. That federal tax reduction is equal to 15% of the interest amount claimed (provincial and territorial amounts will differ by jurisdiction). Interest amounts eligible for the credit are those paid in the current tax year or any of the previous 5 tax years, without limit. And, finally, the student loan interest tax credit can be claimed only by the former student who received the government student loan.

These criteria require former students who are eligible for the credit to consider the following factors in deciding whether to claim the credit, and in what amount.

• Individuals who do not have tax payable for the year will not benefit from claiming the student loan interest tax credit, as there is no tax which the credit can reduce.
• Individuals who have other available tax credits which must be claimed in the year the related expense is incurred should claim those credits first, as the student loan tax credit can be carried forward and claimed in any of the five years after the interest has been paid.
• Where the individual has remaining tax payable in the current year after all other available tax credits have been claimed, the student loan interest tax credit should be claimed only to the extent necessary to reduce tax payable to zero. Any additional claim should be carried forward to a future year or years where it is needed to reduce tax payable.

There is a very important caveat. Once a student has graduated (especially from a professional training program like law or medicine), financial institutions will frequently offer to loan that student sufficient funds to allow the consolidation of all outstanding debts which were incurred to finance his or her education. Often the interest rate to be provided is a preferential one, and can even be lower than the rate which the student borrower would pay under the CSL program.

That preferential interest rate, however, has a “cost” of which most graduates are unaware. The student loan interest tax credit is available only for interest paid on government sponsored student loans. Borrowers cannot claim interest paid on any other kind of loan, even where that loan was used for financing post-secondary education. As well, no credit can be claimed for interest paid on an otherwise qualifying student loan that has been combined with any other kind of loan. If the borrower has obtained a loan from a bank or other financial institution, or has consolidated such a loan with government student loans which would otherwise qualify for the credit, none of the interest paid on that loan or consolidated loan will qualify for the student loan interest tax credit.

Consequently, borrowers who are considering a loan offer from a financial institution must include in their calculations not only the difference in interest rates, but whether any lower interest rate offered by the financial institution will compensate for the loss of any claim for the student loan interest tax credit.

When things work out after graduation in the way everyone hopes they will, the former student will have secured employment at an income sufficient to make repayment of student borrowings possible. Where that’s not the case, and the borrower cannot make repayment as required because of financial hardship, it’s possible to reduce the required monthly repayment through the Repayment Assistance Program. Details of that Program, and much more information on the Canada Student Loan Program generally can be found on the federal government website at https://www.canada.ca/en/services/jobs/education/student-financial-aid/student-loan.html.

When the Canada Pension Plan was launched in the mid-1960s, both the working lives and the retirements of Canadians looked a lot different than they do in 2018. Fifty years ago, most Canadians were able to work at a single full-time job, often held that job for most or all of their working lives and, in many cases, benefitted from an employer sponsored defined benefit pension plan which guaranteed a certain level of income in retirement.

When the Canada Pension Plan was launched in the mid-1960s, both the working lives and the retirements of Canadians looked a lot different than they do in 2018. Fifty years ago, most Canadians were able to work at a single full-time job, often held that job for most or all of their working lives and, in many cases, benefitted from an employer sponsored defined benefit pension plan which guaranteed a certain level of income in retirement.

None of those circumstances accurately describe the current reality for Canadians, either those who are approaching retirement or the younger generation seeking to find their place in the workforce. Defined benefit pension plans, at least in the private sector, simply aren’t part of workplace reality for most Canadian workers. In some cases, corporate bankruptcies have left those who did have such a pension with a reduced pension, or no pension at all. And, while some of those who are nearing retirement may have worked for a single employer for their entire working lives, there are many Canadians for whom corporate downsizing or outsourcing has meant the loss of a long-term position. And, when that happens, replacing that lost income has often meant working on contract or in short-term positions, usually for less compensation.

All of these factors have affected the ability of Canadians to accumulate private savings for retirement through registered pension plans (RPPs) and registered retirement savings plans (RRSPs) and, as a consequence, has increased the degree to which they must rely, in retirement, on government sponsored retirement income programs like the Canada Pension Plan. A few years ago the federal government took a look at the existing structure of the CPP and how well it fit with the current and future needs of retiring Canadians. The result of that review was a decision to make significant changes to the CPP, and the implementation of those changes will begin on January 1, 2019.

Although most Canadians will receive CPP retirement benefits, many are unfamiliar with how the CPP system operates. The CPP is a contributory plan, in which employees and employers each make contributions throughout the working life of the employee, starting at age 18. The amount of contributions made is calculated as 4.95% of income, but there is a maximum annual contribution amount. Effectively, the maximum allowable contribution for a year is currently reached at about $55,000 in income (known as Yearly Maximum Pensionable Earnings, or YMPE). Even where an individual’s income exceeds the YMPE, it’s not possible to make additional CPP contributions for the year. As currently structured, the CPP retirement benefit replaces about 25% of income, based on the current YMPE of $55,000. Finally, the CPP must, by law, be fully funded, meaning that any benefits paid out of the CPP must come from contributions made and income earned from the investment of those contributions.

The changes to be made to the CPP will be implemented over a five-year period, from 2019 to 2025. At the end of that implementation period, the maximum CPP benefit available to retired Canadians will have increased by about 50%. (Currently, the maximum monthly benefit is about $1,135, although the average CPP retirement benefit received is closer to $673.) As a result, by 2025, the CPP retirement benefit will replace about 33% of pre-retirement income, based on the YMPE. In addition, the YMPE will be increased. All of these increases must, of course, be funded, and that funding will come through an increase in the amount of CPP contributions required to be made by employees, employers and the self-employed. Those contribution amount increases will start in January 2019.

Each of the changes outlined above essentially maintain the current structure of the CPP and simply provide for higher contribution amounts resulting in greater CPP benefits. The second change, however, which starts in 2024, effectively provides for a separate, additional required contribution for Canadians who earn more than the YMPE. That separate contribution rate, which is expected to be 4% for both employees and employers, will be calculated as a percentage of income between the YMPE to the upper income limit for the year. That upper income limit will be implemented over a 2-year period and is expected to reach $82,700 in 2025. Individuals who are required to make the additional contribution will be entitled to claim that contribution as a deduction from income for tax purposes.

The first change which working Canadians will notice will be an increase in CPP contribution rates, as of January 1, 2019. That change will be minimal: while CPP contribution rates for 2019 have not yet been announced, the estimate provided when the CPP changes were announced indicated that such changes would mean an increase in contributions of about $6.00 a month in 2019. That increase will accelerate in subsequent years, such that the increase is about $43 per month by 2025.

All working Canadians between the ages of 18 and 65 must contribute to the CPP, and those Canadians, especially younger Canadians, will be most impacted by the upcoming changes. Canadians who remain in the work force past the age of 65 (even if they are already receiving CPP retirement benefits) have the option of continuing to contribute to the CPP up until the age of 70, and receiving increased CPP benefits as a result. After age 70 no one, even if they remain in the work force, can contribute to the CPP.

Canadians also have a choice of when to begin receiving CPP retirement benefits. Such benefits can begin at the age of 60 or can be deferred to as late as age 70. With each year that the receipt of benefits is deferred, the amount of monthly benefit increases.

The decision of when to begin receiving CPP retirement benefits and when to cease making CPP contributions is one which involves the assessment of many individual factors, including living costs in retirement, the availability of other sources of income in retirement, one’s health and employment circumstances and the cost of contributing to the CPP relative to the benefits to be received.

Starting next year, the planned changes to the CPP will be another factor to be included in that calculation.

Most Canadians deal with our tax system only once a year, when preparing the annual tax return. And, while that return – the T1 Individual Income Tax Return – may be only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of the tax-free gain on the sale of a principal residence to the determination of required Canada Pension Plan contributions by self-employed taxpayers.

Most Canadians deal with our tax system only once a year, when preparing the annual tax return. And, while that return – the T1 Individual Income Tax Return – may be only four pages long, the information on those four pages is supported by 13 supplementary federal schedules, dealing with everything from the calculation of the tax-free gain on the sale of a principal residence to the determination of required Canada Pension Plan contributions by self-employed taxpayers.

All of this detail makes it easy for the majority of individuals to overlook valuable deduction and credit claims which may be available to them. And, while the Canada Revenue Agency (CRA) will correct minor arithmetical errors made on the return, it does not (and cannot) assess the taxpayer to include claims for deductions or credits which could have been made but were not.

One such often overlooked claim is the one which can be made for payments made during the taxation year for annual union, professional, or similar dues. It’s a particularly useful claim since the expenditure in question is one which the taxpayer is obliged to make in any event and, where the requisite criteria are satisfied, the amount of such payment is fully deductible from income, without limit. Put another way, the income which was earned and used to pay annual union or professional dues is, where the related deduction is claimed, income on which no tax is paid.

The deduction claimable for union and professional dues is particularly easy to overlook because of where it appears on the annual return. Although there are forms used by self-employed taxpayers to claim business-related costs, as well as forms used by employees to claim allowable employment expenses, the deduction for union or professional dues doesn’t appear on either of those forms. Rather, it shows up as a single line (Line 212) on page 3 of the T1 annual return.

The general rule for claiming such a deduction is described in the annual income tax return guide as follows:

Line 212 - Claim the total of the following amounts related to your employment that you paid (or that were paid for you and reported as income) in the year:

• annual dues for membership in a trade union or an association of public servants;
• professional board dues required under provincial or territorial law;
• professional or malpractice liability insurance premiums or professional membership dues required to keep a professional status recognized by law; and
• parity or advisory committee (or similar body) dues required under provincial or territorial law.

There are, of course, requirements which must be satisfied in or for such payments to qualify for a deduction. The most important such restriction is that amounts paid must be those which are necessary in order for the taxpayer to obtain or maintain his or her professional standing. Every profession and trade has licensing and similar requirements which mandate that an individual maintain membership in a professional or similar association in order to practice his or her profession or trade. The costs of maintaining required membership in those organizations is deductible. Most professions and trades also have one or more voluntary associations which individuals may join by choice. However, the cost of maintaining membership in those voluntary associations, even if related to one’s trade or profession, is not deductible. So, for example, if membership in a given association does not affect professional status (e.g., the Canadian Bar Association for lawyers), dues or fees paid to it are not deductible. If, on the other hand, membership is necessary to maintain professional status (e.g., the Law Society of the province in which the individual lives and practices law), required dues to it are deductible.

While all such associations levy fees as a requirement of continuing membership and the right to practice the profession, invoices received for annual membership fees can cover a number of different charges and levies, and not all of those costs will be deductible. CRA’s policy is that annual membership dues do not include initiation fees, licences, special assessments, or charges for anything other than the organization’s ordinary operating costs. An individual cannot, for instance, claim charges for pension plans as membership dues, even if receipts received show them as dues.

Where a claim for a deduction for professional membership or union dues is made, some other considerations arise. Generally, while it’s not necessary that having a particular professional designation be a requirement of the employee’s position in order for that employee to claim a deduction for related professional dues, the CRA does require that there be some connection between the employment and the professional association in question.

Take, for example, a chemical engineer who is employed by a company to sell chemical products or who is the president of a company that processes chemicals. There is sufficient connection between that person’s qualification as a chemical engineer and his or her employment duties that a deduction would be claimable for the cost of professional dues paid. On the other hand, a lawyer who is working full-time as the CEO of a furniture manufacturing and sales business does not satisfy the requirement and, accordingly, would not be entitled to deduct dues paid to maintain his or her professional status as a lawyer.

It’s not uncommon that an employer is willing to cover the cost of an employee’s professional dues as part of that employee’s benefit package. Where that’s the case, and the employer’s payment of those dues does not appear on the employee’s T4 as a taxable benefit, no deduction for those costs can be claimed by the employee. Where, however, there is a taxable benefit which accrues to the employee (and that benefit is documented on a T4A and must be reported as part of his or her employment income), the employee can claim an offsetting deduction for eligible dues or fees paid, on Line 212 of the return.

General information on the deduction of professional membership fees or union dues is available in the 2017 General Income Tax and Benefit Guide. The same information can be found on the CRA website at www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/212/menu-eng.html.

Anyone who has ever tried to reduce their overall personal or household debt knows that doing so, no matter how disciplined one’s approach, can seem like a one step forward, two steps back proposition. It sometimes seems that, just as measurable progress is achieved in one area (an extra payment is made on the mortgage), unexpected costs in another area (a significant car repair bill) push up the level of debt elsewhere (e.g., credit card debt).

Anyone who has ever tried to reduce their overall personal or household debt knows that doing so, no matter how disciplined one’s approach, can seem like a one step forward, two steps back proposition. It sometimes seems that, just as measurable progress is achieved in one area (an extra payment is made on the mortgage), unexpected costs in another area (a significant car repair bill) push up the level of debt elsewhere (e.g., credit card debt).

That experience is being replicated on a macro level, in the figures for household debt relative to disposable income ratios of Canadian households, as reported by Statistics Canada. Earlier this year, media reports on those statistics were able to include such phrases as “household debt ratio sees biggest drop on record” and “Canada’s household debt burden falls to two-year low”. Those phrases did accurately reflect the statistical information released by Statistics Canada in June of this year. More recently, however, the September StatsCan release led to headlines like “Canadian household debt climbs in second quarter” and “Canada’s household debt back to $1.69 for every dollar of disposable income”.

While it seems that the progress made in reducing household debt in the first quarter of 2018 (as reported in June 2018) has been undone by the latest statistics, there is a small amount of positive news — while the ratio of $1.69 of household debt per dollar of disposable income is clearly very high, it has been higher. In the third quarter of 2017, that ratio hit  $1.73.

While the statistics identify the overall quantum of household debt, the composition of that debt and the demographic characteristics of who carries that debt are probably more important, from the point of view of both individuals and the overall economy.

First, the vast majority of debt held by Canadians and Canadian households is mortgage debt – money borrowed to purchase a home. Specifically, of the $2 trillion owed by Canadians, almost 75% is in the form of mortgage debt. Consequently, no matter how much the debt, that debt is secured by an underlying asset – the property – which can, in the worst-case scenario, be sold to satisfy or retire the mortgage debt.

However, absent that worst-case scenario, the day-to-day concern is the ability to keep up with mortgage payments. As pointed out by the Governor of the Bank of Canada in a presentation made earlier this year, “what matters most is the burden of servicing debt relative to income”. Or, in other words, the percentage of household income which is needed to make the required payments of interest and principal. In that respect, the debt service ratio of Canadians has stayed within the 5 to 7% range for about the last quarter century. Canadians have, in effect, been able to carry higher levels of debt relative to income without increasing their debt service costs, because of the lower interest rates which were in place for most of the past decade.

While that is clearly good news, it is very possible that the average debt service ratio will climb in the near future, as the result of several factors. First, most of the debt held by Canadians is in the form of mortgage debt, which is long-term debt. In most cases, a mortgage is the biggest debt Canadian families ever take on, and most mortgages are paid off over at least a 25-year time span. Consequently, the management of mortgage debt in all interest rate environments is a long-term task – absent the sale of the underlying property, paying off mortgage in the short term isn’t a likely scenario. Second, the Bank of Canada has now increased interest rates five times since July 2017 (two of those increases happening in the past four months). The Bank Rate is now more than double what is was in May 2017, and each increase in that rate has been reflected in higher borrowing costs, including higher mortgage interest rates. It’s likely, however, that most mortgage holders have not yet felt the impact of those increased rates. Most mortgages are fixed-term mortgages (meaning that the rate of interest stays the same throughout the mortgage term, regardless of any increase or decrease in interest rates which take place during that time period). And the majority of the fixed-term mortgages taken out have a five-year term. Consequently, homeowners who took out a five-year fixed term mortgage prior to July 2017 have not felt the effects of the five recent interest rate hikes. However, when their current mortgage comes up for renewal, the rate of interest which they will be paying will certainly be higher than their current rate and, consequently, the cost of servicing that debt will take a bigger chunk of their household income. The concern is that that such increases in those debt servicing costs may be not be manageable and, in the worst-case scenario, could lead to an increase in mortgage default rates.  

Finally, it is important to note that all these figures represent an average of all Canadian households, and to remember that that average is made up of both households that have zero debt and those that are seriously over-leveraged. According to Bank of Canada figures, about 8% of indebted households owe 350% or more of their gross income, representing a bit more than 20% of total household debt. In other words, the degree of financial risk facing Canadian households is very much an individual calculation. Figures announcing the average rate of household debt to income ratios or debt servicing ratios, or the announcement of another increase in interest rates by the Bank of Canada shouldn’t be cause for either individual relief or despair. Rather, they should prompt a review of one’s own person debt and financial circumstances to determine whether those circumstances, and particularly the extent to which they will be impacted by future interest rate increases, is cause for concern. If so, it’s time to take steps to mitigate that future risk, before a debt problem becomes a debt crisis.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues.

Two quarterly newsletters have been added—one dealing with personal issues, and one dealing with corporate issues. They can be accessed below.

Corporate:

Issue #45 Corporate

Personal:

Issue #45 Personal

How to check: At the home page press “F2”. Just below “Product Information” you’ll see “Product” and the type of Quickbooks you are using. If at the end of the product type it says Release R5P that tells us that you are using the 2010 version and if it says R7P then it’s 2009.

FOR QUICKBOOKS “2009”

1. Go to “Lists” (at top of page) – then select “Sales Tax Code List” add new code H

2. Under “Sales Tax Code” (bottom) select “New”

3. Sales Tax Code would be “H” – Description would be “HST” – check off “Taxable” – under Taxable information in the “Tax Item for Purchases” type in HST on Purchases (ITC)

4. A box will come up “Item Not Found, Quickbooks does not have sales information for ‘HST on Purchases’. Would you like to add it now? If not, please go back and select an existing sales tax. – Choose “Yes”.

5. The a new box will come up “New Item”. The “Type” should be Sales Tax Item – under the Sales Tax Name, type in “HST on Purchases (ITC)” and in the “Description” box the “HST on Purchases (ITC) should automatically pop in. Under “Tax Rate (%) or Amt” change the “0.0%” to 13%, and under “Tax Agency (vendor that you collect for)” choose “Receiver General”. Then where it has “Sales Tax Line” choose the pull down and select “Line 106 Input tax Credits (ITCs) “. Then select “OK”

6. The “New Item” box will close and you will have the box “New Sales Tax Code” box showing. At the bottom where it says “Tax Item for Sale” choose the pull down and select “Add New”. Follow the instructions in #5 above with the following exceptions “Sales Tax Name” should be “HST on sales”, the Description should be “HST on sales” and the “Sales Tax Return Line” in the pull down you should select “Line 103 GST/HST collected or collectible” then select “OK”

7. The “New Sales Tax Code” box will now be visible, just select “OK”. Then you’ll see the “Sales Tax Code List” just exit from that.

8. On July 1, 2010 you must go to “Lists” – “Item List”, double click on the name of the 1st item. An “Edit Item” box comes up. Down near the bottom right you’ll see “Tax Code”. Change that to “H” as in “HST”. You will need to do this to each item in your Item List.

NOTE: If you have customers you sell to, who do not have the 13% HST as Ontario/BC you then need to create additional tax codes i.e. 0% (exempt). Then when you edit the “Item List” you would put the appropriate tax code with the item name.

FOR QUICKBOOKS “2010”

1. Go to “Sales Tax” (at top of page), select “Manage Sales Tax”

2. Click on “Change Tax Setup” on the right side under “Sales Tax Setup”

3. In the “Sales Tax Code Setup Wizard” tick on the last item “Set up for British Columbia and/or Ontario”. Select Finish

4. The “Convert your sales tax to HST” box will come up. Beside (1) Set up HST British Columbia , look down just a bit and you’ll see “Set up HST for Ontario” – click and a box “Sales Tax Code Created – A new sales tax code H, has been created for HST in ON.”, click on OK

5. Under #2 “Update default sales tax code, select the “H” from the pull down

6. Do not perform Item #3 “Change the sales tax codes for lists and accounts” if prior to July 1st. If it is July 1st then continue onto Step 7 below.

If Steps 2 to 5 was performed prior to July 1st then go to “Sales Tax”, “Manage Sales Tax”, click on “Assign Tax Codes” on the right hand side. Continue on

7. Select “Change the sales tax codes for lists and accounts”.

8. You’ll see “Items” beside “change tax codes for:” If you go to the pop down you’ll also see Vendors, Customers and Accounts. In each category you can change each listing individually or you can do a “Bulk Change”. If you are going to be using strictly HST you can do everything in bulk, but you may have to do it more than once in each category if you had previously used “S” Standard, “E” Exempt, or “P” PST. Even after the bulk change you can go and change an individual item. To perform the assigning of the tax codes, under “Items” press “Bulk Change”. A “Backup Company” warning will come up. We highly recommend that you create a backup at this point (Note this warning will come up each time you wish to perform the bulk change. It is your choice whether to do another backup or not). Click “Yes” if you wish to make that backup.

After back up is complete you’ll get a box called “Sales Tax Code Bulk Assignment”, with each listing of what needs to be changed. Recommend that you do each listing individually so that you can follow what is happening. Tick the first box “Sales Item”. If previously, you had a lot of “G”s for GST then pick G in the pull down and then select "H" for HST for the going “to”. Click “Next”. You’ll then get a warning telling you what you are about to do, with what and with the number of changes being made. You can then go back to review if you wish or press “Next”. If press next the changes will be made. You can then go and make additional changes to the “Sale Tax Code” or you then go on to the other listings: Purchase Tax Code, Vendors, Customers and Accounts.

9. When all have been performed, press “Close” and “Close”.