My name is Mark Goodfield and I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is about income tax, business, the psychology of money and investing topics and is meant for taxpayers no matter their income bracket, but in particular for high net worth individuals and entrepreneurs who own private corporations. I also blog about whatever else crosses my mind; I have to entertain myself. This is my personal blog and the views and opinions expressed in this blog do not reflect the position of Cunningham LLP. I am blunt and opinionated (at least for a Chartered Professional Accountant). You've been warned.

The blogs posted on The Blunt Bean Counter provide information of a general nature and should not be considered specific advice, as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, April 14, 2014

Confessions of a Tax Accountant -2014- Week 3

Traditionally, I have the largest intake of personal income tax returns the second week of April and this year was no different. This influx in returns is because clients feel they have received all their T-slips and they can finally provide me a complete set of income tax forms and related materials. Notwithstanding that expectation, clients are still receiving T5013 slips and the dreaded amended T3 slip. I am now telling clients that I cannot keep fixing returns for delinquent slips and though no fault of theirs, I am no longer re-running returns to account for a late or amended T-slip (I will just file a T1 adjustment in May).

The T1135 foreign reporting form is still wreaking havoc, but I will not whine again about this ridiculous form. This week I will briefly discuss how clients often neglect to tell us or provide information on self-employment business start-up expenses and capital losses and why it is in their best interests to do so.

Self-Employment Start-up Costs


I frequently find out a client has started a new business during the year, yet they have not provided me any of their expenses. The clients' thought process is; since they have had little or no income, the expenses are not deductible (no reasonable expectation of profit), or they think they will hold the expenses to claim next year.

As you may or may not know, the "old school" reasonable expectation of profit (“REOP”) doctrine was dropped by the CRA a few years ago after they lost several cases. Essentially if an activity is commercial in nature and does not have a personal element, there is no REOP test and the expenses are deductible.

Consequently, any start-up costs should be deducted in the first year (capital items must be depreciated) even if you have no self-employment income, as these expenses can offset your employment and other income.

Capital Losses


I have also found that clients who have capital losses sometimes do not provide the loss information, thinking it is useless if they don’t have capital gains in that year or that they will provide this information in a subsequent year when they have capital gains.

However, capital losses should be reported in the year they are incurred for two reasons:

1. If you do not report them, there is a good chance you will forget to report them in a subsequent year;

2. Capital losses can be carried forward indefinitely to be used against capital gains. Thus, there is no downside to start the clock ticking and you ensure the capital losses will not be missed or forgotten in a future year.

Management Fees – T3s


I have noticed that some T3s report management fees in the footnote box on the right hand side of the T3. It is easy to miss, so be careful to check that box, as these fees are deductible.

Bloggers Note: I am turning off the ability to comment (or see comments) on my posts until April 30th. Sorry, but I just do not have the time to respond.

Monday, April 7, 2014

Confessions of a Tax Accountant -2014- Week 2

This week I finally got rolling and I reviewed several income tax returns. A few issues arose from these reviews which I discuss today.

The first issue is an often overlooked medical expense. The second issue, a matter I have discussed before, is how financial
institutions fail to adjust their realized capital gain/loss reports for flow-through shares and how this can result in significantly understated capital gains. The final issue is the confusion in reporting capital gains from the sale of your mutual fund.

Employee Paid Health Premiums

 

Way down at the bottom of your T4, in box 85, you may find a number. That number is the amount of premiums you paid for your private health service plan. This payment qualifies as a medical expense on line 330 of your return and is very easy to miss. According to this blog, Canadian MoneySaver is the person responsible for box 85.

Your Flow-Through Capital Gain is only Understated by $100,000


In my recent post on The Dynamics of the Investment Advisor/Accountant Relationship, I note that one way for Investment Advisors ("IAs") to lose the accountant as an advocate is to not assist in sorting out their clients flow-through tax shelter information. As I have discussed in the past, the issue is more than an advisory issue, it is a financial institution reporting issue.

Very quickly, if you purchased a flow-through share for $10,000, the Adjusted Cost Base ("ACB") is ground down to zero almost immediately by the initial resource exploration and development expenses you claim. By the end of year 1, your ACB is often nil (the ACB may increase in future years because of income allocations, however, let's assume it stays at zero). In year three or so when the flow-through is converted into a mutual fund, the cost base is nil, even though you originally paid $10,000. Say you sell the mutual fund immediately after converting your flow-through for $4,500. For tax purposes, you have a capital gain of $4,500 since you have a nil cost base. Yet, most financial institutions report the disposition as a capital loss of $5,500 (the $10,000 initial cost less $4,500 proceeds).

I have been told that from a liability perspective, the financial institutions do not want to get into making tax cost base determinations (although, I have seen some of the better IAs and certain investment counsel firms adjust the ACB to the proper amount). I can understand this position; but, I cannot understand why the financial institutions or the IAs do not at least highlight this issue in some way when they print out the realized gain/loss schedule for their clients.

To date, I have had three capital gains reports provided by IAs that were materially wrong because they had the incorrect ACB for flow-through shares. For two of the clients, their actual capital gain was understated by significantly more than $100,000. In summation, these transactions need to be highlighted in some way on capital gain/loss reports.

Mutual Fund Sales - Oops, I thought the gain was on the T3


Do you own mutual funds? If so, you may have to report two capital gains this year. The first capital gain(s) you will have to report will be the capital gain(s) reported on your T3 slip(s) for any mutual funds you still hold at the end of 2013. In addition, if you sold any of your mutual funds in 2013, a second gain, being the capital gain on the disposition of the mutual fund sold must be reported.

I am discussing this issue for two reasons. The first, a client called last week to advise me that after reviewing the capital gains reported on their annual mutual fund statement for 2013, they realized they had missed this information in 2012; so the topic is on the top of my mind. The second reason is preventive. If you have mutual funds, you probably just received your T3 slip in the last couple days, so you may have not yet filed your return. Thus, you have time to review your annual mutual fund statement to check whether you need to report the sale of any funds in 2013.

So let me explain the issue in greater detail. Assume that in 2012 you purchased 1000 units of the BBC Spec Stock Mutual Fund for $7,000 and also purchased 2000 units of the BBC Bond Fund for $8,000. Let’s also assume in the same year you re-invest your distributions to purchase additional units of the BBC funds. So last year you would have received a T3 slip (usually one T3 slip with a supplementary page breaking down the total on a fund by fund basis) from the BBC Mutual Fund reporting interest, dividends and capital gains earned in the year. This income is essentially the distributions you re-invested in the BBC fund.

Many people assume any capital gains they realized on the sale of their mutual fund units are also reflected on these T3’s, however, the T3 slip just reports gains (and other income) the fund itself has earned and distributed in the year, not your proceeds of selling the actual fund.

For example, if in 2012 the BBC Spec Stock Fund owns shares of Rocky Raccoon Mines and during the year the fund sold these shares for a $400,000 gain, your T3 slip for 2012 would have reported your proportionate share of the Rocky Raccoon gain, say $400 if you owned .001% of the fund. This $400 distribution is re-invested in additional Spec Stock BBC units and your adjusted cost base is now $7,400 as of January 1, 2013.

If you sold the Spec fund in 2013 for $8,000, the $600 ($8,000-$7,400) gain will not be reported on a 2013 T3 slip, even though you will receive one for the BBC bond fund you still own. This gain must be reported by you on Schedule 3 of your tax return.

It is very easy to miss the actual sale of your mutual fund units, since this information is often embedded in your annual mutual fund summary. If you own mutual funds and sell a fund during the year, ensure you make a note to yourself to look for the capital gain information on the annual yearly summary and report that gain on your tax return.

Wednesday, April 2, 2014

Retirement Planning Spreadsheet


I often receive insightful and enlightening comments from my readers. I received one such comment in respect of Part 6 of my series on “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!".

When you read the comment (reproduced below), you will note the thought and detail provided. In the last paragraph of the comment, the reader discusses a retirement spreadsheet he created and he suggests that “there ought to be one in the public domain”.

I thought to myself, a reader who appeared so detailed and thorough, must have a pretty good spreadsheet, and thus, I asked him if he would be willing to share his work with others in the public domain.

The reader has agreed to share his retirement spreadsheet so others may benefit from it. I am providing a link at the bottom of this post to his spreadsheet. Please keep in mind that I have only played with the spreadsheet and have not rigorously tested it and any use of the spreadsheet is undertaken at your own risk.

The Reader's Retirement Experience


The comment as initially emailed to me and then subsequently posted on my blog is copied in full below; I find it quite insightful:

At Marks' request, I am posting my previous email to him. I would like to share my experience:

Ten years ago I figured that I could retire. I created a spreadsheet that calculated, year after year, investment return, expense adjusted for inflation, income tax, and remaining capital. The assumptions I used were:

- 2% inflation
 - 4% investment return net of management and trading fees; the entire return fully taxed
- income tax rates remained the same, but brackets adjusted for inflation

My registered accounts were fairly large, so I was careful to calculate each year the minimum withdrawal and the resulting income tax. In fact, one main reason I created this spreadsheet was so that I could play around with registered account withdrawals before minimum withdrawals kick in, to see which strategy would work best.

I did not factor in OAS or CPP (there is always that sticky OAS clawback, and even the Service Canada website cannot give you an accurate CPP amount in a future year when you actually start drawing on it). And I did not factor in my house. Bloggers note: The reader provides for OAS and CPP in his "other income" column.

The expense number I used to start was simply my previous year’s actual expense. In the model, I just ran with this expense, adjusted for inflation. Starting from age 50, it turned out that my withdrawal rate was 3% (excluding income tax), and the money ran out after 45 years. That was how I concluded I could retire.

(It turned out the best withdrawal strategy from registered accounts is to leave the money there as late as possible. The tax savings and resulting returns from these earlier years seem to offset higher income tax during the requisite withdrawal years.)

Here is my experience so far:

- My actual income tax has been lower than calculated, probably because of dividends and unrealized capital gains in my unregistered accounts.

- My actual return on capital yearly had been: 6.62, 6.82, 3.79, -7.27, 11.31, 8.32, 6.12, 6.20 and 7.78%

- My actual expenses (excluding taxes) had fluctuated from year to year, but over 10 years, the actual total expenses are 4% less than the projected total.

As a result, I am ahead of the model I that ran 10 years ago. Every year I update the spreadsheet with actual numbers, so that I can compare where things differ, and also see how the projections change. (I don’t bother updating the tax brackets or the expense projections.) Currently, the projections show that there will be quite a bit of money left after year 47.

Just for curiosity, I plug in a hypothetical withdrawal rate of 4% at age 65 into the spreadsheet, and let it run. Money will run out at age 95. So a 4% withdrawal rate excluding income tax is probably OK but I would be cautious of it.

On the other hand, I did not include OAS and CPP. Also, my situation is a two-income family.

This spreadsheet has been one of my most important financial management tools in the past 10 years. It is not that hard to create a spreadsheet like this where one can fill in one’s numbers and assumptions and see the projections; there ought to be one in the public domain.

Retirement Planning Spreadsheet


Here is the link to the Retirement Spreadsheet (Note: The screen will look haphazard, just go to the top left corner, click file and then click download). My reader has provided instructions on page one. I thank this reader for his selflessness in providing the spreadsheet to others.

The above spreadsheet is for informational purposes only. Both I and the creator of the spreadsheet make no representations and warranties as to its accuracy, completeness or use and you use the spreadsheet at your own risk.

Monday, March 31, 2014

Confessions of a Tax Accountant -2014 -Week 1

For each income tax season since 2011, I have published a series of posts called Confessions of a Tax Accountant. These posts highlight contentious and/or interesting personal income tax issues that arise in my practice during income tax season. Today, I continue with this tradition.

Every year at this time, I whine about the fact I have received very few income tax returns to date and this year is no exception. Most of my clients with complex tax returns still await their T3’s and T5013’s, meaning I will again have a severe income tax crunch the last three weeks of April. I will save you my annual rant on this topic. Since I have reviewed very few returns and have little material to discuss, today's post deals with changes to various forms and issues of an administrative nature.

New T5013 Partnership Information Form


For those of us who/will receive a T5013 tax slip for either our partnership income or flow-through tax shelters, you will notice the absence of one thing on the form; written descriptions for each box on the form. In prior years, each box had a number associated with each box and a written description. For example: for interest income earned, the box said interest from Canadian sources, for carrying charges it said carrying charges. This year, the form in some cases has like forty boxes with only four of those boxes having a written description. It is like looking at a crossword puzzle gone wild.

You have to either read the summary page to determine what each box is for, or use your tax preparation software to match up the box number to the written description. It is extremely frustrating and my clients have no idea what the numbers mean to them.

Online T-slips


For many of us, working in a paperless or online world is now part of our daily routine. However, in situations where paper still rules (such as with tax slips), dealing with the early online adopters can be problematic.

-Even though I have only processed a few returns, I have already had to ask a couple clients for their T-slips from Ing Direct and TD Waterhouse (although some people seem to get paper T-slips from TD Waterhouse, so I am not sure if those not receiving paper forms have elected to receive online receipts) when I noticed they reported income last year, but have no slip this year.

The issue with online tax forms is clients either a) don’t realize they are online or b) forget to download the slip.

Not reporting the income on these slips can be a costly omission if the CRA catches these missing slips when they undertake their matching program in the fall. The non-reporting of these slips could result in a 20% penalty if this is the second time you have missed reporting a slip in the last four years, or it could start the clock ticking on a 20% penalty.

I am not sure of the solution here, but online issuers need to build in a reminder system to their clients when a form has not been downloaded by March 31st (they may already do this, but I am not aware of it if they do).

T1135 Foreign Verification Form


I have written numerous times about the changes to the T1135 Form. Even with the transitional relief provided for this year, this form is still proving problematic. For example, even though you now only have to report the market value of foreign stocks held with a Canadian Institution on December 31, 2013, some broker reports have listings where Canadian and US stocks are intermingled and so we have to pick out the foreign stocks individually.

The form is also proving very troublesome for U.S. citizens who live in Canada and expatriates from other countries, as they have to report foreign stocks they hold outside Canada (they often still have a U.S. or foreign brokerage account) and U.S. or foreign bank accounts.

The CRA should send a few of its representatives to work in an accounting firm for a week and then have them report back on what they think of the new T1135 reporting requirements. I cannot even imagine the mess that will occur if the original rules are re-instated in 2014, where you must list any stock that does not pay a dividend individually.

My problem with this form is that it overwhelms those people who willingly report information that is readily accessible to the CRA, especially where they hold their investments with Canadian financial institutions. While I get why the CRA wants enhanced reporting for taxpayers with assets outside of Canada, I am somewhat skeptical that people hiding and/or not reporting foreign assets will now become compliant because the T1135 is more detailed.

Monday, March 24, 2014

The Dynamics of the Investment Advisor/Accountant Relationship

I have several clients in common with Pat O’Keeffe, First Vice-President and Investment Advisor at CIBC Wood Gundy. Pat and I have often discussed the dynamics of the relationship between the investment advisor (“IA”) and the accountant (“CPA”), and why our relationship works while other IA/CPA
relationships fail. One of Pat’s responsibilities with Wood Gundy is continuing education, in which he is charged with the responsibility of improving the quality of service the IAs offer and to increase their knowledge on all aspects of being a leading edge advisor to higher net worth clients. Pat thought it would be instructive for me to speak to his advisor group in downtown Toronto (which I did a few weeks ago) to provide an accountant’s perspective on the dynamics of this relationship. I summarize my talk in today's post. [Note: I use CPA above because that is my designation. I am not purposely slighting other accounting designations, so please do not send me nasty emails].

I understand some aspects of this post may come off as arrogant, as I am telling IAs what to do and how to act. However, I know I don’t have all the answers. Please also understand I was asked to speak to the CIBC Wood Gundy advisors from a CPAs perspective and this is my interpretation of the relationship and I am blunt (and some would say a bit arrogant :).

You may be asking yourself, why the heck should you care about the IA/CPA relationship? I suggest that my expectations of an IA should become the minimum expectations you have of your IA.

Although I do not discuss this today, if you have a team of advisors, you need to ensure your IA, CPA, lawyer, insurance agent and banker all integrate their advice into one efficient coordinated plan. If your advisors operate at cross purposes, while trying to protect their own fiefdom and fees, you are the ultimate loser in this battle of professional egos.

How the Ideal IA/CPA Relationship Should Work


During my presentation, I suggested and it was agreed upon by the CIBC advisors present, that the ideal IA/CPA relationship should be as follows:

• Client centric – The best interests of the client should always be the first priority

• No turf battles – Many financial issues have an investment and tax component. It is important the IA does not overstep their expertise and provide tax advice to cut out the CPA, while the CPA needs to stay within their tax and advisory expertise and not attempt to provide investment advice. I know I have a good relationship with an IA when they call me for tax or financial advice on clients I have no vested interest in; because they know I will help them with their client. This also works the other way where I can call an IA for an opinion on what another IA is doing or for an explanation of an insurance product, etc.

• Proactive – Whether the IA has a new insurance idea or the CPA thinks a prescribed rate loan is appropriate, the IA and CPA should work together to ensure they are providing proactive advice before the client hears it at a cocktail party or seminar put on by another IA or CPA.

• Financial Hero’s – In a strong IA and CPA relationship, the synergies of the relationship should result in both parties becoming hero’s in the client’s eye. For example, an IA recently referred me a client that was not a good fit for the firm she was using. By working together with the IA and because of my knowledge and experience in working with owner-managers, we were able to not only lower the client’s fees, but provide more practical and proactive income tax advice. The client was very pleased with both of us.

The Accountant is the Trusted Advisor


During my presentation, I suggested to the IAs that some studies have concluded that the CPA is the client’s most trusted advisor. I further suggested that whether they agreed or not with that assertion, they needed to understand and acknowledge that dynamic. Although, I work very well with many IAs, over the years I have had reason to suggest to a few clients that their IAs were weak and should be replaced. In most cases they have replaced their IAs. My point here; if you are an IA, you should try and work with your client’s CPA, as it is in your own interest to have them as an ally as opposed to an enemy.

The Grey Areas of the Relationship


The following issues are often contentious and can cause a fracture in the IA/CPA relationship:

1. Who is responsible for determining the adjusted cost base of a personal tax client’s investments?

Most CPAs feel it is the IAs responsibility in all cases for personal clients. During my presentation, there was full agreement by the CIBC advisors on this point. The reason for this is unless an CPA is specifically engaged to track a client’s stock investments, they have no idea what stocks and bonds their clients are buying throughout the year and they have no reason to track such.

2. Who is responsible for determining the adjusted cost base of a corporate client’s investments?

The IAs again felt this was their responsibility. I surprised them by stating that in this case I felt we had a joint responsibility, since for corporate clients, CPAs track the ACB of the client’s investments when we prepare their financial statements.

3. Who is responsible for providing information to complete the T1135 Foreign Income Verification Form?

As I have discussed several times on this blog, the new reporting requirements that force taxpayers to report individual stocks held in Canadian Institutions that do not pay dividends (postponed until 2014 as per the recent transitional announcement) will be a massive issue next year. IAs told me they consider the determination of the fair market value of foreign stocks held during the year, their responsibility. However, they noted that should the rules not change for 2014; the systems of all Canadian Financial Institutions will need to be tweaked to provide reporting on the dividend exception issue.

4. Who is responsible for Income Tax Attributes?

I suggested it was the CPAs responsibility to provide the IA any capital loss carryforward information and RRSP and TFSA contribution limits. However, I told them I thought it was the IAs responsibility to contact the CPA to confirm this information before making any of these contributions.

How to Lose the Accountant as Your Advocate


During my presentation I suggested to the IAs that the following actions or inaction could alienate their client’s accountant:

1. Give the CPA a hard time when they ask for duplicate tax slips. We are only asking because the client did not receive the slip or has misplaced the slip.

2. Don’t provide the CPA adjusted cost base information or realized capital gain/loss reports. As noted above, in my opinion, this is clearly the IAs responsibility.

3. Don’t assist with flow-through information. Flow-through limited partnerships are a strange animal. They start under one entity and are converted into a mutual fund typically a couple years later. CPAs often have a hard time following the conversion process because (a) the share conversions are never one to one, so it is hard to know which flow-through was converted to which mutual fund and (b) it is very time intensive work sorting this out and CPAs do not have time to waste on this during tax season.

4. Practice income tax. In prior years I have had a couple clients' IA transfer stocks with huge unrealized capital
losses to their RRSPs. The result, the tax-loss is denied and lost forever. I have also had IAs suggest to clients that they purchase very large quantities of flow-through shares without discussing their suggestion with me. Clients can become very upset with their IA when I prepare their income tax return and tell them they owe substantial minimum tax because of the excessive flow-through purchase. I have also seen IAs make transfers for probate purposes without considering the income tax costs amongst many other transgressions.

How an IA can Lose a Client


I suggested to the group that the following acts may cause them to lose a client:

• Not taking into account the client’s area of business. For example, should your asset allocation be heavy in REITs if the client’s personal corporation holds significant rental properties?

• Cause a RRSP or TFSA over-contribution because you did not confirm the contribution limits with the CPA. I don’t think IAs understand how upset clients get when this happens and what a huge strike this is against them over such a small issue.

• Have client pay tax on capital gains when the client has large unrealized losses. In November, I touch base with many of my client’s IAs, or they call me, to discuss whether there is an opportunity to tax loss sell. Although it may make investment sense to not sell stocks with unrealized losses, IAs need to speak to their clients in November or December to explain their rationale for not selling; so the client is not upset in April when they incur a large income tax bill.

• Don’t review annual returns with clients. Most IAs are very good about this, but if you ignore your client and don’t have at minimum a yearly meeting, know that I am asking my client if they have reviewed their returns for the year with you. If  they say no, I will usually figure it out myself and then compare the returns to index returns. 

Finally, if you're an IA, the reality is I like many other CPAs; prefer to work with other quality advisors, whether they are IAs, lawyers, valuators, bankers etc. For both yours and your clients benefit, you should strive to be one of those quality advisors.

Wednesday, March 19, 2014

Reporting of Internet Business Activities for 2013

The Canada Revenue Agency ("CRA") has been very concerned over the last few years about income tax “slippage” due to Internet commerce. This is a very complicated issue that deals with the location of servers and offshore tax planning.

The CRA has now set it sights on a much easier target, that being income earned from a website or webpage. As of January 1, 2013, the CRA now requires corporations to file Schedule 88, a one-page “Internet Business Activities” as part of their T2 return if the corporation earns income from one or more webpages or websites.

There is a similar requirement for unincorporated businesses on the revised Form T2125 (see Internet Business Activities section) so my fellow bloggers who are sole proprietors or partners in a business are now also caught by this disclosure requirement.

Income from Webpages or Websites


According to the schedule, income from webpages or websites includes:

  • The sale of goods and/or services through a website that includes the processing of payment transactions online
  • The sale of goods and/or services through a website that requires customers to either call, complete or submit a form, send an email to make a purchase, place an order, booking and/or other transactions
  • The sale of goods and/or services through an auction, marketplace or website operated by others
  • Income earned from advertising, income programs or other traffic your site generates

 

Reporting Requirements


Corporations (Schedule 88) and unincorporated businesses (T2125) must report the following information on:

  • Number of Internet webpages or websites your corporation earns income from
  • Provide the Internet webpage or website addresses (URL)
  • The percentage of gross revenue generated from the Internet in comparison to the total gross revenue
The CRA has not clarified to my knowledge if they require the form if the corporation has already filed their 2013 return.

Monday, March 17, 2014

10 Ways to Avoid a Tax Audit


Two weeks ago, Adam Mayers the Personal Finance Editor of the Toronto Star wrote a column on 6 tips to steer clear of an income tax audit. The tips included suggestions from Henry Korenblum, a tax manager in Toronto with Crowe Soberman LLP and yours truly.

I liked Adam’s idea so much, I decided to Dave Letterman it, and prepare a list of the top 10 ways to avoid a tax audit for personal income tax returns (except I will not work my way down from ten to one).

Before I present my list, I want to elaborate on Adam's comments on the difference between an information request and an audit, as I find many people are unclear about the distinction.

Information Requests


As Adam noted, these requests are typically innocuous. The CRA usually sends a letter asking for back-up information relating to a deduction or credit claimed on your return. Generally these requests are to provide support for items such as a donation tax credit, medical expense claim, support payment claim, a child care expense claim, a children's fitness tax credit claim or an interest expense claim. These requests are fairly common and more often than not, relate to personal income tax returns that were E-filed. Typically, once you provide the information requested, you do not hear anything further from the CRA.

Audit

 

An audit, which can take the form of a desk audit (which are typically undertaken to review an item that the CRA finds unusual in nature or specifically wants to review) or a full blown audit, are invasive and stressful and often result in a tax reassessment of some kind.

Top Ten Tips to Avoid a Personal Tax Audit


1. Avoid conflict (only being slightly sarcastic here). Many audits are triggered by a scorned spouse/lover, business partner you have had a falling out with or a dismissed employee. Many hostile divorce negotiations end quickly when one spouse tells the other they will be snitching to the CRA if they don’t get what they want. On the other hand, in acrimonious divorce negotiations, the threatened spouse often tells the "snitch" spouse to go ahead, since after the CRA takes everything they will get nothing. As you can see, these negotiations can get quite interesting to say the least.

2. File your return on time. Late filed returns often seem to pique the CRA’s interest.

3. Do not write explanatory notes or letters to the CRA with your return. I have often been referred new clients who had the crazy idea the CRA wanted to hear why they did or did not do something and created far larger problems for themselves by trying to explain away one issue, while creating multiple other issues. I always thought reading these letters would be the most amusing part of working for the CRA.

4. Unless you have a travel log to support your auto expenses, be reasonable in the percentage of business use you claim in respect of your auto expenses.

5. Don't make up expenses. If you don't have actual receipts to support the expense, do not make the claim.

6. I know this is easier said than done, but if you are separated or divorced, try and agree in your separation agreement who will claim which expenses and which credits. Often both spouses claim the same children and same expenses on both returns. The CRA does not really appreciate duplicate claims.

7. Report foreign income, especially income from countries we exchange information with. Many people earn income in the U.S. or U.K. and do not report that income. The CRA exchanges information with both of these countries and they are like a “dog on a bone” once they realize you have not reported this income; plus the penalties can be very large.

8. Report the rental income attributable to the owner. For some unknown reason, many people seem to think the legal ownership of a rental property (and investment accounts) is irrelevant for tax purposes. I have seen several circumstances where spouses jointly own a rental property and they decide to just have the lower income spouse report 100% of the rental income (and often the spouse not reporting the income paid for the property). While this is often difficult for the CRA to find, they are not too impressed when they ask for a purchase and sale agreement and see that one of the legal owners has not reported any of the rental income or capital gains.

9. If you claim expenses as an employee, commission salesperson or self-employed business, do not claim personal expenses. I have seen people claim suits, dresses, nanny expenses (as administrative), facials, personal travel, etc. Claiming these expenses automatically casts a cloud over your honesty and auditors get their antennae up high.

10. File a departure tax return if you leave Canada. I have seen many situations where people move overseas or are transferred and do not file a final Canadian return, or file the return, but do not answer the question on the return about the date they left Canada. The CRA then keeps sending requests to file and often leads to an unnecessary review of their returns and residence.

I Guess Someone Other than my Mom is Reading this Blog


Over the last month, I have had over 21,000 unique visitors to The Blunt Bean Counter and over 75,000 page views; due in large part to my six-part series on "How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!". I am very pleased that so many people found value in the retirement series! (The series is now in Flip Book form - link here.) I would like to thank my loyal blog followers and welcome the many new ones. I appreciate you reading my ramblings.