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One of the more common expenses claimed by taxpayers is automobile expenses (applies to any motor vehicle such as a van, bus, pickup truck, station wagon, SUV, or other truck). Many individuals use their automobiles for work or business and incur personal expenses in doing so. It is important to note that only expenses of a business nature are eligible as a deduction against their related income. As such, the Canada Revenue Agency (CRA) has strict requirements in ensuring that only business-related expenses are claimed. As a result, the retention of automobile tax records becomes imperative for every taxpayer that uses an automobile for work or business.

Maintaining Automobile Expenses

Several software applications now exist to easily keep track of total mileage, business mileage and reasons for the trip, and expenses. The type of expenses to keep track of can be broken down into two categories. They are operating and fixed expenses.

Operating Expenses

The types of operating expenses related to an automobile include gasoline, maintenance, and repairs (such as oil changes and car washes), insurance, license, and registration fees. Such expenses may vary in relation to the number of kilometers driven.

Fixed Expenses

Fixed expenses differ from operating expenses in that they relate to the automobile itself as opposed to the number of kilometers driven. When an automobile is purchased, it would relate to the capital cost allowance and interest expense when financed. In the case of a leased automobile, such expenses would include the lease payments. It is important to note that there are special rules and restrictions which limit the portion of actual costs that can be included in your total expenses. You can consult with your Padgett Business Services representative to obtain more information on what these special rules and limitations are.

Deductible Expenses

Because your automobile will most likely be utilized for both business and personal reasons, it is essential that the total automobile expenses be allocated between these two uses on a reasonable basis in order to arrive at only the deductible portion for income tax purposes. The best method to achieve this will involve the distance traveled calculated by taking the total kilometers driven for business purposes divided by the total kilometers driven for both business and personal goals. Certain expenses such as parking expenses incurred while on a business trip and car repairs made because of an accident while on a business trip do not have to be prorated. However, such expenses incurred resulting from a personal trip made are not deductible.

The Underused Housing Tax (“UHT”) is a new Federal tax of 1% on the value of vacant or underused housing in Canada that took effect on January 1, 2022. In reading that first line, you probably think this doesn’t apply to you. Think again. Think of penalties of $5,000 for individuals and $10,000 for corporations.

There are many situations where there will be an exemption from this 1% tax, but you’d still be required to file the new UHT annual return (UHT-2900) or be assessed those penalties. We’ve heard of many cases in the past where people have been assessed a $1,500 penalty for not filing a T1135 form reporting their foreign assets, even though they declared all the income on those foreign assets. So don’t assume CRA won’t assess those penalties, just because you qualify for an exemption from this tax.

There are many details about this new tax and its exemptions. Here are a few key points to consider:

• Only residential properties are affected – detached or semi-detached homes that contain 3 dwelling units or less; a townhouse; a condo; duplexes and triplexes.
• Canadian citizens and permanent residents qualify for an exemption from the 1% tax and filing of the annual return – but this exemption doesn’t apply if you are a partner of a partnership, or a trustee (other than a personal representative for a deceased taxpayer).
• There’s no exemption from filing the return for private corporations.
• Don’t confuse this tax with other “vacancy” taxes on residential properties that are provincial or municipal-based. This is a federal tax.
• There is no time limit for the CRA to assess the UHT, penalties, and interest.

The first UHT return is due on April 30th, 2023, for residential properties held as of December 31, 2022. Contact your Padgett advisor to discuss your situation.

RRSP Contributions

March 1, 2023 is the deadline to make RRSP contributions to be eligible for a deduction in your 2022 personal tax return. Contributions made after this date will not be deductible against 2022 income. The contribution limit for 2022 is $29,210 although this may be less if you have an employer-provided pension plan or deferred profit-sharing plan. Your overall contribution room may also be reduced if you overcontributed in prior years, or higher if you haven’t maximized your past years’ RRSP contributions. There is only a $2,000 margin for overcontribution errors. Beyond this amount, you will have to pay a 1% per month penalty tax on overcontributions. You should review your RRSP contribution room on the Notice of Assessment for your 2021 tax year issued to you by the Canada Revenue Agency (“CRA”).

TFSA Limit

The Tax-Free Savings Account limit was increased to $6,500 for 2023. Be sure to track your TFSA contributions since there are penalties for overcontributions and there’s no margin for error like with the RRSP. Although CRA does keep track of your TFSA contribution room, information on contributions you make to your TFSA is not automatically uploaded to CRA by your financial institution. The CRA receives this information only annually and it takes time for CRA to process this information. So be careful of this timing delay if you are verifying your TFSA contribution room through the CRA portal “My Account”

First-time home buyers tax credit – also known as the Home Buyers Amount. This credit will be doubled from $5,000 to $10,000 as of 2022. At a 15% tax credit rate, this translates into $1,500 of tax savings for qualifying home buyers. You are a “first-time” home buyer if neither you nor your spouse/common-law partner, owned a home in the year you bought the new home, nor in any of the previous 4 calendar years. If you have a disability, you might not have to be a “first-time” home buyer to qualify if the reason for the new home purchase is to live in a home that is more accessible and suited to your needs. Be sure to advise your Padgett advisor if you bought a home in 2022 and you think you may qualify. Also, be sure you’ve advised CRA of your change of address.

Home Accessibility Credit – this credit has also doubled. The amount of expenses eligible for credit for 2022 has increased from $10,000 to $20,000. At the 15% tax credit rate, this converts to $3,000 of tax savings on eligible expenses. This credit is to assist individuals to gain access to, or to be more mobile or functional in their dwelling, or reduce their risks related thereto. Modifications will generally qualify if the individual qualifies for the disability tax credit or is 65 years or older.

These expenses can be paid on behalf of yourself, or in some cases for certain dependents. The expenses should be of an enduring nature and integrated into the home. In general, if the item purchased will not become a permanent part of the home, it is not eligible. Of course, detailed invoices, agreements, and receipts need to be kept should the CRA want to verify the claim. The expenses will not be reduced by any federal or provincial government assistance provided. Examples of qualified renovations include grab bars and handrails, walk-in bathtubs or wheel-in showers, wheelchair ramps, widening doorways for wheelchair accessibility, or lowering existing counters and cupboards among others. The expenditures may also qualify for the medical expense tax credit, and some provincial credits as well (British Colombia, Ontario, New Brunswick, and to a lesser extent Quebec) – a potential double or triple claim.

Multi-Generation Home Renovation Tax Credit – this is a new tax credit effective January 1, 2023. Its purpose is to help taxpayers to care for adult relatives in their own homes by providing some tax relief on expenses incurred to build a secondary suite for the family member who is a senior, or an adult who has a disability, to move into. The secondary suite must be a self-contained housing unit that has a private entrance, kitchen, bathroom, and sleeping area. Additionally, the home being renovated must be inhabited or reasonably expected to be inhabited within 12 months after the end of the renovations. Routine repairs, appliances, electronic home-entertainment systems, security monitoring, housekeeping, and interest costs relating to the renovation won’t qualify for the credit. The tax credit is 15% of the expenses, a maximum of $50,000, which works out to a maximum credit of $7,500. The credit is also refundable. This means that if the tax credit is more than your taxes payable, you will get a refund.

The ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes is increased to $36,000 (plus applicable federal and provincial sales taxes) for non-zero emission vehicles and to $61 000 for eligible zero-emission passenger vehicles.  These ceilings restrict the cost of a vehicle on which CCA may be claimed for business purposes.

The limit on deductible leasing costs increases to $950 per month (plus applicable federal and provincial sales taxes). This limit, which ensures that the level of deductions for leased and purchased vehicles is consistent, is one of two restrictions on the deduction of automobile lease payments. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling.

The limit on the deduction of tax-exempt allowances paid by employers to employees increased to 68¢ per kilometer for the first 5,000 kilometers driven and 62¢ for each additional kilometer. The allowance amounts reflect the key cost components of owning and operating an automobile, such as depreciation, financing, maintenance, and fuel costs.

The maximum allowable interest deduction for amounts borrowed to purchase an automobile remains at $300. This limit supposedly reflects the reasonable cost of financing a vehicle for business purposes although with the interest rate increases we have seen in the past year this is surprising.

The general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers will increase to 33¢ per kilometer. For taxpayers employed principally in selling or leasing automobiles, the prescribed rate will increase to 30¢ per kilometer. The amount of the benefit reflects the costs of operating an automobile. Do not forget that there is an additional benefit simply from having an employer-provided vehicle available for personal use which is called the automobile “standby charge”. There is a special formula to calculate the benefit, which is reported on the T4 slip and included in the employee’s income. In order to compute this standby charge and operating cost benefit, it is important that total and business kilometers are tracked throughout the year. 

As an employer, you are responsible for remitting GST/HST on employee taxable benefits unless the benefit is tax exempt or zero-rated. A common example of a tax benefit that is not exempt includes the automobile standby charge and operating expense benefit. 

The rate that needs to be remitted depends on the location your employee ordinarily worked in, or the location to which he or she ordinarily reported to.

You are considered to have collected an amount equal to a percentage of the value of the benefit for GST/HST purposes, based on one of the following rates:

Automobile operating expense benefit: 

• 11% for Nova Scotia; Prince Edward Island (PEI), New Brunswick, Newfoundland and Labrador;
• 9% for Ontario;
• 3% for the rest of Canada.

Other Than Automobile Operating Expense Benefits: 
Automobile operating expense benefit: 

• 14/114 for Nova Scotia, PEI, New Brunswick, Newfoundland and Labrador;
• 12/112 for Ontario;
• 4/104 for the rest of Canada.
• The above rates may be reduced for large businesses.

In Budget 2022, the federal government proposed the Tax-Free First Home Savings Account (FHSA). The most recent draft legislation has proposed April 1, 2023 as an effective date. Here is a summary of this new registered plan which is based upon the draft legislation to date: 

• The FHSA gives prospective first-time home buyers the ability to save $40,000 on a tax-free basis. It’s a bit of a hybrid between a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).  Contributions would be tax-deductible like an RRSP, and withdrawals to purchase a first home – including the investment income earned in the plan – would be non-taxable, like a TFSA.
• To open a FHSA, you must be a Canadian resident who is 18 years of age or older. In addition, you must be a first-time home buyer. This means neither you nor your spouse has owned a home in which you lived in the year the account is opened or in the preceding four calendar years.
• The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. You can claim an income tax deduction for contributions made in a given year. Unlike RRSPs, contributions made within the first 60 days of a given year could not be attributed to the previous tax year. However, like RRSPs, you aren’t required to claim the deduction right away. Instead, you can carryforward non-deducted contributions and claim them in a later year if you are expecting to be in a higher tax bracket in the future. 
• You are allowed to carry forward unused portions of your annual contribution limit but only up to a maximum of $8,000.  For example, if you contributed $5,000 to a FHSA in 2023 you would be allowed to contribute $11,000 in 2024 (i.e., $8,000 plus the remaining $3,000 from 2023). So, unlike a RRSP and a TFSA, unused contribution room of prior years doesn’t carryforward except for a maximum amount of $8 000. 
• The FHSA can remain open for up to 15 years. So there needs to be some consideration as to when the FHSA should be opened to start saving. Starting too young may mean the account has to be closed before a home is purchased. However, any savings in the FHSA not used to buy a qualifying home can be transferred on a tax-free basis into an RRSP. It can also be withdrawn on a taxable basis. If transferred to a RRSP, it would not reduce the RRSP contribution room.
• One of the more recent changes made to the draft legislation is that you can now use both the FHSA and the Home Buyer’s Plan (HBP). The HBP provides for a tax-free withdrawal from your RRSP, up to $35 000, but the amount must be repaid into the RRSP in equal annual instalments over 15 years. Otherwise, the unpaid instalment amount is included in your taxable income for that year. The goal is to provide some cashflow for first time home buyers and eventually replenish the RRSP to continue the non-taxed investment growth to save for retirement.  With the FHSA, you can preserve your RRSP contribution room and contribute to the FHSA instead. Plus, unlike the HBP, the FHSA withdrawals don’t need to be repaid to avoid taxation, so that’s more tax advantageous. 
• Using both the HBP and the FHSA will provide a total of $75 000 of capital, plus the growth on the funds contributed to the FHSA.
• It’s also possible to transfer money from the RRSP on a tax-free basis to the FHSA subject to the annual contribution limits. Since those RRSP contributions were deducted for tax savings when contributed, you won’t get a deduction on the transfer to the FHSA. The advantage is that the withdrawal will be tax free, but without the requirement to repay it as with the HBP. That’s good on cashflow, but not great for saving for retirement as the RRSP doesn’t get replenished and the RRSP contribution room isn’t reinstated for the amount transferred to the FHSA. 

Bottom line, the FHSA provides some additional tax advantages and flexibility, but some tax planning relative to your specific case may be needed.