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 Chartered Professional Accountant and a partner with a National Accounting Firm 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 are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

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.