Whether it's the impact of interest rates or avoiding OAS clawback, the devil is in the detail
With the key income tax filing date fast approaching, it’s important to inform clients of changes to help them maximise their returns.
In general, there are limited tax changes from 2021 to 2022, but there are several important things to note, according to Kevin Burkett, portfolio manager for Burkett Asset Management and tax partner at Burkett & Co. Chartered Professional Accountants in Victoria, B.C. told Wealth Professional.
First, most people’s income tax filing date is Monday, May 1, since April 30 is a Sunday. Self-employed people have until June 15, but – if they owe taxes – those are due by May 1, too, and can incur a large interest penalty if they’re late. With rising interest rates, the Canada Revenue Agency (CRA) has also increased the interest rates that it charges on overdue taxes or instalment payments. That now sits at 8% rather than 5%.
“When rates were lower, people would be a little more casual about making payments on their taxes or making their instalments on time,” said Burkett. “Given that it’s now 8%, people will want to pay attention to those deadlines and make sure they make their payments in advance of when they’re required to avoid attracting interest at that higher rate.”
Advisors should also touch base with clients who may have received COVID-related programs. Some programs stretched into 2022, so clients need to note whether they received, or must repay, those.
There was also more latitude in claiming work-from home expenses during the pandemic, which has been continued into 2022. The government is allowing those who have worked from home to claim $2 per day, up to a maximum of $500. Previously, employers had to fill out T2200 forms saying they had granted their employees the right to work at home and the kind of work they did, so Burkett noted that few people qualified for that tax deduction.
If the clients are going to file their income tax early, before the end of March, they should also be aware that they may not have received all of their T3 investment income slips yet. They won’t even be in the government’s electronic system yet for clients to file electronically. That concerns Burkett because, while clients get one free pass for missing one T3 slip, they will be charged 10% of any subsequent T3s that they fail to file. The penalties – such as 10% of $1,000 creating a $100 fine – can quickly add up. “So, your clients want to be very careful that they have all of their T3 slips,” he said.
Burkett also pointed out that many of the items on clients’ personal tax returns are indexed to a 6.3% inflation and have increased for 2023. He noted that it’s important for advisors to let their clients know “even if the tax rates are the same, they’re now benefiting from higher thresholds”.
The income threshold for clawing back Old Age Security (OAS) payments has also been increased to $86,912 in 2022 from $81,761 in 2021. That’s more than a $5,000 increase, which is notable for advisors who are finally planning for their retired clients. They will be able to draw a little more out of their registered plans without tax consequences for the withdrawals than they have in the past without having to worry about losing their monthly OAS payments.
“Retired folks are often hyper-focused on not having their OAS clawed back,” said Burkett. “I’ve seen people go to extreme lengths to hang on to their OAS, so it’s a number that drives a lot of their financial planning activity.”
The maximum RRSP contribution limit has been increased to $30,780 in 2023 from $29,210 in 2022.
The CRA has also been threatening to charge a $100 processing fee to anyone who writes them a cheque for more than $10,000 to pay their taxes. While the new rule hasn’t come into effect yet, Burkett is encouraging advisors to work with their clients, particularly the older ones, to ensure that those who have been used to paying their tax bill by cheque can set up an alternative bill payment system with their bank to avoid that fee when it is finally introduced.