My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Friday, April 8, 2011

Confessions of a Tax Accountant- Week 6-Spousal RRSPs & Foreign reporting

As of today, 70% of my client’s income tax returns have been submitted; that is a 30% increase in the last week. This sudden surge, directly correlates to the fact that this week, my clients finally started receiving their T3 slips and some T5013 slips. This is the last blog in which I will bore my readers with income tax return statistics. Suffice to say, I think I have proven my point, that the March filing deadline for T3's and T5013's wreaks havoc upon accountants and taxpayers who wish to file their income tax returns on a more timely basis.

This week, two issues arose that I will discuss. The first issue, spousal RRSP contributions, is much discussed in financial blogs and financial publications and the second issue, foreign income reporting is not necessarily on everyone's radar.

Every year, at least one client over-contributes to their RRSP. Typically, this is caused when a client makes a contribution to their RRSP and then makes a second contribution to a spousal RRSP, assuming the spousal contribution is based on their spouses RRSP limit, not their own RRSP limit.

When you contribute to a spousal RRSP, the plan and the plan assets are controlled by your spouse. Notwithstanding the control issue, a spousal RRSP contribution is an RRSP contribution made by you in your spouse's name, it is not a RRSP contribution made by your spouse. Your spousal RRSP contribution, when combined with your personal RRSP contribution, may not exceed your personal RRSP deduction limit.

A second issue that arose this week was whether a client had to check the box on the front page of their income tax return in response to the question “Did you own or hold foreign property at any time in 2010 with a total cost of more than CAN$100,000?”. In the case at hand, my client had a Florida condominium from which they were earning rental revenue and a question arose as to whether they were required to report the property on Form T1135 or whether the property was excluded from filing.

The uncertainty in regard to this issue arises because you are not required to report the condominium on Form T1135 if it is held primarily for your personal use and enjoyment. However, where a foreign rental property is used to earn rental income, it may have to be reported on Form T1135 (see questions and answers on page 3 of  the T1135 link above).

The answers on page 3 of the form above are meant to provide clarification of the issue, but actually blur the issue. The term "primarily" usually means greater than 50%. However, in stating the facts for this question, the CRA states in part (B) of the question if "rented out ...with a reasonable expectation of profit". So, what happens if you only rent out your condo say 40% of the time (thus primarily for personal use), but you earn large rental income, such that you have an expectation of profit? Is the condo now a reportable entity or not. Personally, I would advise clients to err on the side of caution and report the condo on Form T1135.

Another foreign reporting issue is noted in a blog by the Canadian Capitalist. Many taxpayers are not aware that if they own US stocks, even if they are held in a Canadian brokerage account, these US stocks are subject to these rules and you may possibly have to file Form T1135.       

Failure to file Form T1135 could result in a penalty of $25 a day up to $2,500.               

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts 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.

6 comments:

  1. With pension income splitting, do you think it's worthwhile to make spousal RRSP contributions at all?

    Also, assuming the Conservatives win the election and expand TFSAs, would you expect people to make this their primary retirement savings vehicle? Presumably it makes sense to provide for some hardly-taxed RRSP income at retirement, but TFSAs should have a lower total cost compared to RRSPs.

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  2. Skuj, you definitely win the prize for the most interactive reader. Good thing I have stats. telling me how many people are reading or I would think you were the only one:)

    Spousal RRSPs are still useful if (1) you have any fear the legislation will be changed (unlikely) (2) you are over 71 and still working and thus have RRSP contribution room, since you can continue making spousal RRSPs and finally,(3)if both spouses are younger than 65, the pension splitting rules are limited, so a spousal RRSP would provide for for income splitting and smoothing of income pre-age 65.

    As per my blog March blog "The Kid in the Candy Store", I like RRSPs because they have an "invisible fence" around them that make them more untouchable than TFSA's. However, with a $10,000 a year limit,I think you are correct, people will start to use them as their main retirement vehicle, which may or may not become problematic.

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  3. Hi!
    Here's a question for you... When does it make sense for someone to move from doing their own taxes to seeking the services of an accountant? I finished university two years ago and now my tax situation is growing more complex (i.e. I have a full time job and a side business run as a sole proprietor). Last year and this year, a CA friend of the family has helped me out for free but it is a very minimal service level (which is fine since it is free). I have no idea what kind of fees I would like pay for proper tax advice/planning at an accounting firm and when it makes sense to do so.

    ~ Tom

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  4. Hi Tom:

    The simple answer would be that if your return is essentially all slips, most of the software out there will be sufficient; however, what many people fail to really take into account is that the software only spits out what you put into it, so there is no art involved. For example, even for my clients with slips only (albeit, typically large slips), I may still tax plan for them using say a prescribed interest rate loan to a spouse to split income.

    I could also answer that income plays a significant role, the higher your income, the more it makes sense to engage an accountant.

    Finally, I could also answer, that once you have self employment income such as yourself, it makes sense to engage an accountant.I personally try to provide not only income tax advice to my clients, but overall estate and wealth planning advice and that is what you should look for in whomever you engage. The issue is quality and price (I am not cheap as my clients like to remind me) of accountants varies as with any other service provider, so you should ask friends or parents etc who they use and get a recommendation.

    If I may be blunt, since I am the Blunt Bean Counter, if you called me, I would not take you as a client at this stage (unless I thought your side business had great upside), but would refer you to a sole practitioner who may charge $300 to $450 to do a return such as yours (just guessing without seeing what you have). I think that would be an appropriate first step, you would then grow with the sole practitioner or if your business became successful and you outgrew your sole practitioner, you would then move to a midsize firm like mine. Hope that helps.

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  5. Hi,

    Thanks for your thoughtful answer and for being blunt; it is appreciated. May I also say that I respect the professionalism in referring me elsewhere, since I don't think I'm a good fit as a client right now. Navigating the world of accounting as a client can be a challenge.

    The point about being well rounded (e.g. tax advice combined with related services such as estate and wealth planning etc) is also well taken.

    Please do keep up the blog - I've been reading it for quite some time and find it very interesting, particularly the "day in a life" issues. Might I suggest a post or two on this topic: How To Be A Good Accounting Client (besides paying on time...).

    ~ Tom

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  6. Tom, thx for the kind words. I like the topic, sort of turns the tables upside down. I will use it in the future.

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