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 15, 2011

Confessions of a Tax Accountant-Week 7-Late T3 slips & T2202A slips

Those Straggler T3 slips

This week, a few clients for whom we had already filed income tax returns, received additional T3 slips in the mail.  The receipt of these forms will necessitate the preparation of T1 Adjustment requests in May to account for these missed slips. This is a huge waste of time and energy for our firm and for the Canada Revenue Agency to process these forms, and frustrates our clients to no end.

The receipt of these additional T3 forms raises two questions: the first is “why do clients not realize they have additional slips outstanding”, and the second is, “do they have too many accounts to start with"?

In regards to question one, we find the confusion typically relates to income trusts. If a client has one or two income trusts, it is not very hard to track which T3s are outstanding. But many of our clients have multiple income trust units and it becomes extremely difficult to track what has been received.

The major investment firms attempt to do their part in tracking T3 slips, as they typically include a listing of income trusts for which information is still outstanding. However, as this listing arrives with several pages of administrative papers, many clients do not even keep the list. Even when you have this list, the T3s seem to come in batches, so one T3 may have three income trusts reported, but not include four others. Then you receive another T3 and it includes only one income trust and finally you receive a final T3 that has the final three income trusts reported. In the end, it is very hard for clients, the client’s investment advisors and their accountants to track whether all the income trusts have been accounted for in the tax return. This problem thankfully, should subside next year as many income trusts have converted to corporations.

In respect to the second question, many clients just have too many accounts and deal with too many institutions and/or advisors. This leads to dysfunctional investing and portfolio management. This issue will be a topic for a future blog.

Cyberspace and T2202A tax slips

This week, much like every week prior, I had several clients provide their university/college-aged child’s income tax materials without their T2202A tuition form. In the “old days” this form was mailed, however, these days, the institutions do not mail the receipt, but rather place them on their website and thus the form must be accessed by the student. I would suggest the percentage of students who ever notice or pay attention to this comes in around 10%. Thus, without the parent or accountant requesting this information, it is forgotten and potentially missed as a credit.

The tuition information is important for two reasons. The first reason is that in most cases, the child can transfer up to $5,000 of the tuition, education amount and textbook amount to their parents or grandparents (federally) if these amounts are not required to reduce the child’s taxable income. The second reason is that excess balances of these credits that are not transferred or utilized can be carried forward by the student to be used once they become taxable (i.e. commence full-time employment).

So for example, assume a typical student who pays $6,000 in tuition and attends school for eight months full time. This student will have tuition credits of $9,720 ($6,000 tuition plus $3,720 ($400 +$65 a month x 8), for full time education and text book credits respectively. Assuming $5,000 of this credit is transferred to their parent or grandparent, the student has a tuition credit carryover of $4,720 ($9,720-$5,000). There are  also provincial credits, but they pretty much mirror the federal credit. It should be noted a student can make approximately $11,000 of employment income before the tuition credit is impacted.

Thus, after four years, the tuition credit carryforward  could approach $20,000. When your child files their first income tax return reporting full time employment income, they will potentially have a credit worth approximately $4,000 (being $20,000 tuition carryover times 15% federal credit plus 5.05% Ontario tax credit).

If your son or daughter is in a specialty business school or similar professional school and pays say $20,000 a year in tuition, the federal tuition credit carryover could potentially be $18,720 ($23,720 less $5,000). This size credit could potentially lead to a refund of almost $19,000 in their first year or two of full-time employment.

[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.

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