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Important Tax and Other Tips and Traps for Seniors

 Review these questions and if you have “yes” answers, see the following information for further actions that may be required, some of which will avoid penalties and others to save you taxes.

Seek individual professional advice, where necessary, because the rules are complex and changing frequently.  I accept no liability based on reliance of the information below because of too many personal and/or other limiting factors affecting your personal situation.  You should seek professional advice from your own legal and financial professional advisors before relying or taking action on any of these issues because CRA interpretations or legislation may have changed, or my interpretation may differ from your own advisor.

(Also see my article titled “Personal Real Estate Tips and Traps – Taxes and Ownership Issues”)

1          Do you have a bank account, investment account or a GIC/ term deposit that held $50,000 or more at any time in the year that is set up jointly or in trust for a child or grandchild?

If a Yes Answer: Starting in 2023, if financial assets are being held in trust for another person, and the account balance was $50,000 or higher at anytime during the year, you likely have an obligation to file a T3 Trust Income Tax and Information Return.  If not filed, the penalty will be equal to $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500.  Additional penalties apply for negligence if the return was knowingly not filed.  As noted above, seek individual professional advice for this and all yes answers below. See the CRA web site – https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2018-equality-growth-strong-middle-class/reporting-requirements-trusts.html

2          Do you have a bank account in joint name with a child?

If a Yes Answer:  Do you want that child to have the balance of that account at any time they need it, as well as when you die?  If yes, and you have other children who are not listed on that joint account, you should have clear documentation that you only want the child whose name is on the account to receive it upon your death.  You should obtain legal advice on how to prepare appropriate documentation.

If you have set up the joint account for your own convenience, such as to allow someone to help you do your own banking, pay bills, etc., you should use a Power of Attorney for this purpose, not a joint account.  With a joint owner on your bank account, you have placed your money at risk.  What if your child gets into financial trouble and enters bankruptcy; is sued; develops an addiction and needs money; is subjected to a scam; or desperately needs money for some other purpose?  You may lose half or all of your money.  Consider changes to protect your money; use of a Power of Attorney would be a better approach.  This is especially so if you want the money shared by all of your children, and to avoid family disputes or legal challenges after you die.

3          Do you hold any assets in your name “in trust” for anyone?

If a Yes Answer: The government introduced new reporting rules starting in 2023 for assets being held in trust for another person.  Also see my answer to1 above and my article titled “Personal Real Estate Tips and Traps – Taxes and Ownership Issues” regarding real estate held in trust and/or joint ownership.  If one of a few exceptions do not apply (such as financial accounts with balances under $50,000, and bare trusts), you may have an obligation to file a T3 Trust Income Tax and Information Return.  See the CRA website here: https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html .  On this website, CRA defines a “bare trust” as one where the trustee holds title to the property but has no rights to make decisions regarding the property, thereby being an “agent” only.  They say, “A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.”  Hopefully, this explanation will help you determine whether you need to file a trust tax return. Professional advice is recommended.

4          Has your financial advisor recommended that you take money out of your RRSP sooner than when you really need it or to take more than the minimum amount from your RRIF?

4(i)      If Yes, were you shown a financial projection proving it was the best option based on a variety of assumptions for investment rates, life expectancies, tax rates, etc.?

If a Yes Answer: A research study was conducted by Doug Chandler, FSA, FCIA, on behalf of the FP Canada Research Foundation™ titled “Retirement Drawdown and Choices – RRIF, TFSA and Non-Registered Accounts”, in October 2022.  The study concluded that an in-depth analysis should be prepared by financial planners before making a recommendation for early withdrawals from an RRSP.  One of the quotes from the study states, “Once the full complexity of investment risks, longevity risks and Canada’s morass of taxes, credits and income-tested benefits for seniors was taken into account, this research concluded that simple, single-scenario projections of the value of a drawdown strategy are unreliable and misleading.”  This “yes” answer requires no further action, but only if you received a financial projection that showed you many possible scenarios, which is often not the case.  Furthermore, the assumptions that were used should start with reasonable figures, and then be adjusted up and down to see the resulting impact.  What are reasonable starting figures? I suggest using those recommended by the Financial Planning Standards Council of Canada that are issued annually to Certified Financial Planner designation holders.  See pages 18 and 19 on this web document: https://www.fpcanada.ca/docs/default-source/standards/2024-pag—english.pdf    See the article on my website discussing the consideration of appropriate timing for RRSP and RRIF withdrawals: https://www.corkumfinancial.ca/rrsp-and-rrif-withdrawal-timing-considerations/

4(ii)       Also, if Yes, have you taken a loan in conjunction with taking money from your RRSP (or for any other investment purposes)?

If a Yes Answer: Borrowing money to invest in the stock market is a very risky practice, and best left to the wealthy – meaning, do not do it unless you can afford to repay the loan without using the income or principal from the investments you bought with the borrowed money.  Did you borrow money without the risks being explained to you? Were you presented with a sales presentation showing that this loan would reduce your income taxes on your RRSP withdrawals, and make you wealthier because you took the money out of your RRSP early?  If so, I suggest you ensure you got the whole story.  You should have been shown three projections – one of doing nothing but taking the minimum out of your RRSP when you need to take it; a second of borrowing money and drawing down the RRSP, and a third (often not shown) of borrowing money and leaving the money in your RRSP.  My experience is that if the same assumptions are used in each scenario, the third alternative will usually show you wealthier by keeping the money in your RRSP.  Finally, you should have been shown the same three projections again using a variety of assumptions, with different rates of return, inflation rates and life expectancies to ensure the answer is the same in the majority of situations. (See 4(i)) Of course, with low or negative investment returns, both alternatives two and three will show you much poorer.  Please read my article on my website https://www.corkumfinancial.ca/leveraging-should-you-borrow-money-to-invest/  and get a second opinion if you are still doing this.  Also see my answer to the previous question.

5          If you have a child born in 1958 or later and you are receiving CPP,  are you are unsure if you applied for the Child Rearing Dropout provision when filling out your CPP application?  (Answer yes if you are unsure or know that you did not apply for it.)

If a Yes Answer:  The Child Rearing Dropout provision enables Service Canada to remove any low income years from the calculation of your average earnings for the period that your children were under age 7.  Removal of low income years results in higher average earnings and a higher CPP pension, unless you are already at the maximum.  If this provision was not claimed by a deceased spouse, it may also increase your survivor pension.  CPP applicants often miss checking the box that indicates they wish to have this provision applied, and you may be entitled to a retroactive payment if the situation applies to you.  See this web site from more information – https://www.canada.ca/en/services/benefits/publicpensions/cpp/child-rearing.html .  Contact Service Canada to verify whether you had applied or not.

6          Are you a widow(er) from age 60 to 64 with an income of less than $29,112 in 2024 (before counting Old Age Security)(the amounts change by inflation each year);

Have you have been widowed in the past;

Would your late spouse now be age 65 or older; and

You are not receiving an Allowance under the Guaranteed Income Supplement program.

If a Yes Answer to all of the above:  At a recent seminar, Service Canada personnel indicated that widowed individuals often do not realize their entitlement to an allowance at age 60, particularly if they were widowed at a young age and also perhaps remarried subsequently.  While the applicability may be limited because of the low income threshold, you or someone you know may have an entitlement.  For information about the Guaranteed Income Supplement and related Allowance, see this web site: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/guaranteed-income-supplement.html .  Also see the description on this web site about how to calculate your income for this purpose.

7          Have you ever worked in a foreign country?

If a Yes Answer:  Have you checked to see if you may be entitled to a work pension or social security pension from that country?  Perhaps you have additional retirement income to which you are entitled?

8          Do you pay rent for your home or apartment in Canada to someone who lives outside of Canada, i.e., is your landlord a non-resident of Canada?

If a Yes Answer:  A Canadian who pays rent to a non-resident has a legal requirement to withhold income taxes from their rent and pay it directly to the Canada Revenue Agency.  This liability exists even if a tenant is unaware that their landlord lives outside of Canada, so reasonable inquiry of the landlord’s residency is important.  See the CRA website(which is for landlords, but it explains the tenant’s requirements) for more information- https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rental-income-non-resident-tax/filing-reporting-requirements.html

 

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum

Personal Real Estate Tips and Traps – Taxes and Ownership Issues

Review these questions below and if you have “yes” answers, see the further actions that may be required, some of which will avoid penalties and others to save you taxes.

If you would rather see or print a PDF file, click here: Personal Real Estate Tips and Traps – Taxes and Ownership Issues

Seek individual professional advice, where necessary, because the rules are complex and changing frequently.  I accept no liability based on reliance of the information below because of too many personal and/or other limiting factors affecting your personal situation.  You should seek professional advice from your own legal and financial professional advisors before relying or taking action on any of these issues because CRA interpretations or legislation may have changed, or my interpretations may differ from those of your own trusted advisors.

(Also see my article “Important Tax and Other Tips and Traps for Seniors”)

1          Do you have a home held in your name on behalf of a child because they were unable to obtain financing, and do you consider this property as really belonging to them instead of you?

If a Yes Answer: The government introduced new reporting rules starting in 2023 for assets being held in trust for another person.  If one of a few exceptions do not apply (such as financial accounts with balances under $50,000, and bare trusts), you may have an obligation to file a T3 Trust Income Tax and Information Return.  Initially, holding of any property such as real estate as described here required a trust tax return to be filed.  However, on March 29, 2024, 2 days before the filing deadline, the CRA announced that the filing required for “bare” trusts has been halted until further notice.  See the CRA website here: https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html .  On this website, CRA defines a “bare trust” as one where the trustee holds title to the property but has no rights to make decisions regarding the property, thereby being an “agent” only.  They say, “A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.”  Hopefully, this explanation will help you determine whether you need to file a trust tax return.  If the child is in control, not you, it is likely a bare trust.

You should also note that home ownership trusts, based on the current and proposed legislation, also had a requirement to file an Underused Housing Tax (“UHT”) Return for 2022.  This requirement was amended for 2023 and the filing is now only required by trusts where a non-resident, non-Canadian citizen is a beneficiary  This still leaves the 2022 requirement to file, unless a further amendment is made.  See your own financial advisor if you are as confused as most people.  Also see UHT questions and answers on this CRA web site- https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/uhtn15/questions-answers-underused-housing-tax.html .  See the 2023 Fall Economic Statement here – https://www.budget.canada.ca/fes-eea/2023/report-rapport/tm-mf-en.html#a31  with the UHT amendments under Sales and Excise Tax Measures.

2          Is the home in which you live held jointly with your children?

2(i)      If Yes, is it everyone’s understanding that:

(a)       The home is owned equally by all of you with sharing of all legal responsibilities and for all purposes?

If a Yes Answer: At the time the property was transferred to joint name, it should have been reported on your personal income tax return.  If you did not report it, especially if the transfer occurred in 2016 or later, it is important to file retroactive amendments in order to take advantage of the principal residence exemption and/or to report unpaid taxes.  To claim the exemption, CRA may assess a late filing penalty for form T2091 (or T1255 for a deceased person) of $100 per month to a maximum of $8,000.  Based on my experience to date, it is possible that these penalties may not be assessed if you voluntarily come forward.  You may wish to use the Voluntary Disclosure process to ensure penalties are not assessed, but professional advice is strongly suggested.  If penalties are assessed, you may be successful in having them waived under the Taxpayer Relief provisions. However, you may still wish to consider the cost of the penalty versus the income tax savings to be obtained to determine whether you want to claim the exemption.  Regardless, after 2015, CRA has no time limit to find and reassess you for unreported taxes on real estate sales and transfers.  It is important to take corrective action on your own to avoid or reduce penalties for not reporting taxable income.  For changes related to the principal residence filing requirements, see this CRA web site – https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2016-growing-middle-class/reporting-sale-your-principal-residence-individuals.html .

In addition, if the home is not held jointly by all of your children, and you do not have clear documentation that you only want the children who are on the property title to receive it upon your death, there may be legal questions regarding who is entitled to the property on your death.  This is based on the Supreme Court case of Pecore vs. Pecore (2007 SCC 17 (CanLII), [2007] 1 SCR 795).  Adult children are presumed to hold joint property in trust for their parents unless there is evidence to the contrary.  See the case summary here  – https://canliiconnects.org/en/summaries/33319#:~:text=The%20court%27s%20decision%20surrounded%20the,that%20a%20gift%20was%20intended  You should obtain legal advice from your lawyer, and prepare documentation setting out who are the intended to be the “real” owners of the property.

2(ii)     (b)       Or, if Yes, do you consider that you still own 100% of the home and the purpose of joint ownership is only to make the transfer to your other joint owners easier upon your death?

If a Yes Answer: In this situation, the joint owners are likely holding a portion of the property “in trust” for you until your death. Consequently, it is likely that the property will still need to be listed as your asset upon death, and be subject to distribution according to your Will (and subject to probate fees).  Discuss this with your lawyer.  Also, see the answer to Question 1 above for further information about the possible requirement for filing trust tax returns and a 2022 Underused Housing Tax Return.

3          Do you live in your own home, but you have transferred all ownership to your children while keeping a “life interest” for yourself? A life interest is a guarantee that you can live there as long as you wish.

If a Yes Answer:  At the time the property was transferred to joint name, it should have been reported on your personal income tax return.  If the transfer occurred in 2016 or later, it is important to file retroactive amendments in order to take advantage of the principal residence exemption and/or to report unpaid taxes.  Note that the principal residence normally only includes 1.24 acres of land.  Also, see the answer to Question 2(i) above for further information.

For the years after you transfer your home to the children, it will no longer be defined as a principal residence for you as you no longer own the home.  Assuming no children are living in the home, any increase in value of the home from the time of title change until it is sold will be subject to capital gains taxes.  Furthermore, if the property is sold prior to your death, the capital gains taxes will likely be higher than if the property is sold after your death because there is a value to the life interest that will not be transferred to the children.  See the article on my website discussing life interests https://www.corkumfinancial.ca/life-interests-and-the-family-home-probate-vs-taxes/ .

4          Have you gifted, sold or transferred any real estate to another person, including to joint name, in 2016 or later (whether it was your principal residence or other property)?

If a Yes Answer: For any transfers in 2016 or later, it is important to file retroactive amendments in order to take advantage of the principal residence exemption and/or to report unpaid taxes.  CRA can reassess you for any unreported real estate transactions back to and including 2016, and unless you filed the election to claim the principal residence exemption, the transfer of your home will be taxable as a capital gain.  See further discussion in the answer to Question 2(i) above.  See the CRA explanation of reporting transfers of real estate at this site: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/real-estate-depreciable-property-other-properties/real-estate.html  Any sales or gifts of property, whether during lifetime or death, to anyone other than a spouse is treated as a deemed sale at fair market value, and required taxes must be paid.  See the CRA web site here – https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/transfers-capital-property/other-transfers-property.html  There are penalties and interest that may apply, and seeking professional advice promptly is important.

5          Do you pay rent for your home or apartment in Canada to someone who lives outside of Canada, i.e., is your landlord a non-resident of Canada?

If a Yes Answer:  A Canadian who pays rent to a non-resident has a legal requirement to withhold income taxes from their rent and pay it directly to the Canada Revenue Agency.  This liability exists even if a tenant is unaware that their landlord lives outside of Canada, so reasonable inquiry of the landlord’s residency is important.  See the CRA website(which is for landlords, but it explains the tenant’s requirements) for more information- https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rental-income-non-resident-tax/filing-reporting-requirements.html

6          Do you own land that was farmed in the past by your parents, grandparents or great grandparents, even if it is no longer farmed?

If a Yes Answer: You may be able to claim a farming capital gains exemption if one of the following two scenarios apply in respect of the property.  Scenario 1 applies if the property has been owned by the taxpayer for at least 24 months before disposal.  Scenario 2 applies if the property is still owned from a time before June 18, 1987.  A child includes a grandchild, great grandchild and maybe a foster child and son or daughter-in-law.  Also see below re: in-laws. [Income Tax Act ss. 252(2), 110.6(1) and 70(10)]:

Scenario 1 [See Income Tax Act 110.6(1.3)(a)(ii)(A)(a)]

A property owned at the time of sale will be considered to be carried on in farming if

(i)        the property was owned for at least 24 months before the date of sale by either a parent or child, and

(ii)       in at least two years while the property was owned by either parent or child, the gross farming revenue by the operator exceeded their income from that all other sources, and

(iii)      the property was used more than 50% in the farming business where either the parent or child were actively engaged on a regular and continuous basis.

Therefore, regardless of which person owned the property, as long as these tests can be met by any one of them, the property will likely be qualified farm property.  [CRA Technical Interpretation 2023-0963801C6]

Similar rules relate to partnerships and corporation shareholders, as well as to individuals involved in fishing.

Scenario 2 [See Income Tax Act 110.6(1.3)(a)(ii)(A)(c)]

A property owned at the time of sale will be considered to be carried on in farming

(i)        if the property was acquired by the child (grandchild or great grandchild) before June 18, 1987 and

(ii)       in the year of disposal by the child, the property was used more than 50% in the course of carrying on the business of farming in Canada by the parent or child or, if not, then

(iii)      (ii) in at least five years during which the property was owned by either the parent or the child, the property was used more than 50% in the course of carrying on the business of farming in Canada by parent or child.

What about in-laws?

Note that a son or daughter-in-law qualifies as a child only while the parent is alive, and before the breakdown of any marriage or common-law relationship.  The CRA states in their interpretation #2008-0285271C6 “that where there is a breakdown of a relationship following a divorce or death, an individual will cease to be connected by marriage or connected by blood relationship to the parents of their former’s spouse.”  Although the in-law will no longer be a child after that time, CRA states that the farming gross revenue test can be met based on the test being conducted for the period when the family relationship still existed, and if met, then with the in-law would a child during this time and  can also qualify to claim the exemption if ownership tests are met.

It should be obvious that professional tax advice is essential in these situations.

7          Are you planning to sell personal land holdings?

7(i)      If a Yes Answer: Have you ever subdivided that property?

If a Yes Answer: You will likely need to charge GST/HST unless

  1. a) the land has been subdivided into no more than two parts at any time during ownership by that individual. Subdividing your original property into two lots will not trigger any GST/HST upon its sale, but subdividing it to make a third lot will result in taxes upon sale of that third lot.
  2. b) If the land has been subdivided into more than two parts, any part sold to a relative would be exempt.

Obtain professional tax advice.  Refer to CRA GST/HST Memorandum 19.5 Land and Associated Real Property here: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/19-5/land-associated-real-property.html

7(ii)     Also, if a Yes Answer for planning to sell the property: Have you earned income from the property, such as rental of land to a farmer or rental of buildings for storage?

If a Yes Answer: You may need to charge GST or HST on your selling price, even if the land was not subdivided.  Based on interpretations by the GST side of the Canada Revenue Agency, a review of the facts is necessary, and the following comments are based on one of their interpretations.

  1. a) Did you operate a “business?” CRA says, “for GST/HST purposes, a business is defined to include an undertaking of any kind whatever, whether the undertaking is engaged in for profit. It is further defined as any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, license or similar arrangement.”  [This differs from the Income Tax Act where property rental is not considered a business unless there are more than five full-time employees hired.]
  2. b) Is the property used primarily [usually meaning more than 50%] for business, which “is a question of fact and is generally not based upon a single factor, but rather upon a weighing of all factors.” [See Appendix A to GST/HST Memorandum 19.5, Land and Associated Real Property] “If there is no evidence of personal use, this would suggest business use and conversely, if there is no evidence of business use, this would suggest personal use.  For example, an individual owns real property, which they use for their own personal use and enjoyment and they supply portions of it by way of lease. Where the individual’s personal-use time spent on the real property is limited, and much of their time and energy (for example, upkeep and maintenance of the property), with respect to the property can be attributed towards its rental activities, the real property is generally viewed as used primarily in a business.”
  3. c) “Where there is sufficient evidence to indicate capital real property was used primarily in a business, the question then arises if there is a reasonable expectation of profit. The CRA interpretation for GST is that, generally, when a person’s gross income generated from the lease(s) of real property is greater than the expenses attributed thereto, this suggests that the business had a reasonable expectation of profit.”  For example, was your land rental revenue greater than the property taxes and related expenses to maintain the land?

Conclusion on GST/HST:

Even if you do not believe you are “in business,” if you are deemed by the CRA to be operating a business, the  primary use of the property is for that business, and you have a reasonable expectation of profit, you will be expected to charge GST or HST.  You should obtain professional advice from a tax advisor with GST/HST expertise, and perhaps consider a ruling or interpretation from the CRA, before selling the property without GST/HST to avoid the chance of a costly reassessment later.  See the CRA Memorandum noted in 7(i) above.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum