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.

Monday, September 19, 2011

20 Things I Don’t Understand About Income Tax

Rob Carrick recently wrote a great column in The Globe & Mail entitled, “20 things I don’t understand about personal finance”. The article caused me to smirk and chuckle several times. As they say, imitation is the sincerest form of flattery, so here are the top 20 things I do not understand about income tax:

1. Why can’t spouses file joint income tax returns as is permitted in the United States? It would equalize income tax rates, simplify our tax system, reduce the administrative time required to prepare and process personal income taxes and reduce the amount of paper the Canada Revenue Agency ("CRA") receives each year.
2. Why are parents only allowed a transfer of $5,000 of their child’s unused tuition, education and book credits? The parent is often the one who paid the costs of tuition, why is the credit transfer restricted. At a minimum, this cap should be re-evaluated in the wake of rising tuition costs.

3. Why people are so consumed with saving income tax that they buy tax shelters of dubious nature? There are numerous shelters or schemes out there that purport to reduce income taxes significantly. People are so hungry to reduce their taxes that they forgot their common sense – if it sounds too good to be true, it probably is.

4. Why child care expenses must be claimed by the lower income spouse? The motivation behind the child care deduction is to get people with children back to work to help drive the economy. Who’s to say which spouse was the spouse that was enabled to head back into the work force by hiring child care?

5. Why so many people ask for their RESP tax deduction receipt? Receipts aren’t necessary since the contributions are not tax deductible.

6. Why when one spouse has a tax refund and the other owes money, you can’t net the refund and tax payment against each other? Again, this would simplify our tax system and reduce the administration and paper work for the CRA.

7. Why people are loathe to realize a capital gain on an investment because they will have to pay income tax on the gain (which by the way, will be subject to tax at maximum rate of 23%)? Often individuals wait too long before selling and end up converting what would have been a capital gain into a capital loss (case in point: individuals who held shares of Nortel too long because they did not want to pay the income tax on the inherent gain). I have a whole blog on this topic upcoming.

8. Why do so many people think they can contribute the maximum RRSP limit to both their spousal RRSP and their own RRSP? It is one RRSP limit per person, regardless of the number of RRSPs contributed to.

9. Why people complain about income tax preparation fees, which help reduce the risk of costly potential future re-assessments, yet they are willing to "blow" thousands of dollars on investments in ridiculous companies or options trading they heard about on the radio without blinking an eye? 

10. Why don’t people who can deduct their car expenses, not note their odometer reading on January 1st and December 31st of each year. This would provide them with at least the total km driven in a given year, even if they are not willing to keep log books? The CRA has relaxed their administrative position concerning log books recently, but I still think there is no substitution for a log book and at minimum, noting your odometer readings at the beginning and end of each year.

11. Why the withholding taxes on RRSPs are graduated? Withdrawals up to $5,000 are subject to a 10% withholding tax; withdrawals between $5,001 and $15,000 are subject to a 20% withholding tax; and withdrawals of $15,001 or greater are subject to a 30% withholding tax. These graduated rates often cause significant income tax owing in April since the size of the withdrawal has no correlation to the taxpayer’s marginal income tax rate. All withdrawals should be subject to higher withholding rates (or withholding at the highest marginal tax rate) to prevent this issue.

12. Why does the CRA constantly send information requests for documentation to support child care claims in relation to nannies? Taxpayers are required to report the nannies social insurance number when claiming a child care expense. All that is required by the CRA is to match the social insurance number to the T4 filed by the employer for the nanny. The CRA has other programs which match items in a person’s tax return to a T-slip, why can’t they include this?

13. Why do people pay no attention to the RRSP contribution limit information on their income tax assessments when planning their RRSP contributions for the year? An individual’s RRSP contribution limit for the upcoming year is printed right on the Notice of Assessment for the prior year. It is also available on-line assuming that you register for on-line access on the Canada Revenue Agency’s website.

14. Why don’t people create a file folder for charitable donations they make during the year? If a donation is made online, they can print out the confirmation at the same time and replace the confirmation with the actual online receipt when received. Alternativey, if a cheque or pledge is made, make a copy and replace that copy when the actual receipt is received in the mail. By doing such, at year end it will be clear which donation receipts are missing and have to be chased down.

15. Why do people have money in non-registered accounts but yet they have not fully funded their TFSAs? Just transfer $5,000 each year, non-taxable is always better than taxable.

16. What do post-secondary aged children have against printing out their T2202A tuition receipts for their parents without being admonished? They are now at the age where they are supposed to be considered responsible adults – they should act like one.

17. Why do people who buy stocks not create a spreadsheet to track the cost (adjusted cost base) of the stocks purchased? In addition, when stocks are inherited from parents or grandparents, why not note the value reported on the parent’s or grandparent’s terminal income tax return so the cost base is not lost. You wouldn’t believe the number of times that shares have been passed down from one generation to the next where the recipient has no idea of the actual cost base.

18. Why do people transfer assets to try and save probate taxes without understanding the consequences for income tax. See my blog on probate taxes for a discussion of some of the possible detrimental income tax consequences when tranfers are made blindly for probate purposes.

19. Does the public transit credit or the children’s fitness/activity credit really incentivize anyone to use public transit or put their child in a sports/activity program? The tax benefit from these credits is so small. If the government really wanted to advocate these behaviours or activities there are better ways to do this than offer petty tax credits.

20. Should the labour sponsored funds tax credit be more appropriately called the convert $5,000 and turn it into a $1,000 credit? Enough said.

I am sure I could come up with another list of 20 plus things I don’t understand about income tax, but I will leave that for another blog for a rainy day.

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.

13 comments:

  1. Interesting list. For item 6, I can see some concerns about getting money to a mother to benefit children. If an abusive husband can coerce his wife to transfer her refund to him it could take food out of the children's mouths. Beyond this questionable justification, I can't see any other reason.

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  2. Hey Michael, I never even considered that scenario, sort of a dark scenario. But unfortunately, in such a situation as you describe, the wife would probably be forced to hand over any money she has anyways. If we look at most couples who have joint accounts it is sort of ridculous a cheque goes out to pay tax and then CRA issues one for the refund.

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  3. Wow, you dont know how much I agree with #4. My wife went back to work part time and our child care costs are hardly deductible and if i got to claim them, we would get 40% back. The lower income spouse rule for child care is so unfair.

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  4. Anon, I do know how much you agree with #4, it is one of my client's largest complaints every tax season. In some cases the tax savings would be as high as $5-9k more if the higher earning spouse could claim the child care costs.

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  5. Along the lines of Carrick's millionaires are the ones writing the books... it's the millionaires running the LSIF's too.

    Got schooled once and my "mandatory" holding period ends next March. sigh.

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  6. Anon, I hate to break the news to you, but the holding period may not end your misery. Many LSIF's cannot even be sold at that point. I only bought these once, but I still can only sell a small portion each year even after the holding period ended, as there is not enough liquidity to redeem all the shares.

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  7. A couple to add to your list. Why can self-employed claim mortgage interest of their office in home but employees can't.
    Why can employees claim depreciation only on autos and not on computers and other equipment.

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  8. Boy, it feels like I write this blog for the Hillbilly Mountain Daily or something, everyone is named Anonymous.

    Some great points. You mean to tell me you don’t claim CCA on your musical instrument:) the only other CCA deduction for employees. To add to your point about home office, it gets worse, only commission employees can deduct property taxes and insurance.

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  9. Further point on #4 - the $7,000 limit on daycare costs is ridiculous. In Toronto daycare for <3 year old is $1,825 per month. For a country that complains about a low birth rate this sure is a funny way of raising it.

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  10. Why does Ontario have these narrow tax brackets where the marginal tax rate jumps by 25%, then goes back down? ("Ontario Health Premium")

    Why did the CRA request a copy of my T2202A? The university only provides a PDF, and surely they sent the same electronic form to the CRA. Does the CRA not have a printer?

    Will Harper and Hudak actually keep their promise to do away with question 1?

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  11. Question 15 answer:
    Because people actually research the topic!
    Interest rates on most TFSA's are lower than regular saving or GIC accounts, plus money withdrawal from TFSA results in a hefty surcharge - from $50 to $150, efficiently bringing interest earned-to-date down to nothing.

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  12. Anon, no need to get snarky with your answer. Remember I am the Blunt Bean Counter and I could come back that I now have $25k in my TFSA since I use it to trade and not invest in GIC’s. So your points are valid if you invest in GIC’s, but personally, I like the tax free capital gain component and I trade in this account.

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  13. "Why did the CRA request a copy of my T2202A? The university only provides a PDF, and surely they sent the same electronic form to the CRA. Does the CRA not have a printer?"


    Because the uni does not send the T2202A info to CRA. If CRA wants to verify, they ask to see the student's slip first. If there are any inconsistancies, then they will check with the uni and compare.

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