Formalize Housing Loans to Your Married Children!

In this day and age of skyrocketing housing prices, it's not unusual for parents to provide their married children with a loan to assist them in purchasing a home. In many cases, a mortgage as opposed to a loan would be the preferable legal avenue. However, today I am restricting the discussion to housing loans to make you aware that even when a loan is formalized, it may not protect a family's financial interest when a child's marriage falls apart.

Many parents are savvy enough to legally document housing loans to their children, whether the loan is interest bearing, interest free or in some cases, essentially a forgivable loan. Nevertheless, despite the parent’s best intentions, if their child divorces, there is a chance that the parent’s loan will not be considered a valid debt for purposes of the Ontario Family Law Act (FLA). This can happen if there are no actual physical cash payments made on the loan, (amongst other criteria), which one would expect to see with a typical loan. As I am not a lawyer, I cannot comment on how similar or dissimilar the Ontario Family Law Act is to Acts in other provinces.

Where a loan is not considered valid under the FLA, the principal may be significantly discounted, or excluded as a debt for purposes of a child’s net family property which impacts the equalization payment upon divorce. In plain English, a child will not be able to reduce his or her assets on the date of separation by the debt obligation to his/her parents. This results in a greater amount of assets that must be split with their ex-spouse.

Lawyers drafting a debt document typically ensure that the loan has an interest rate, as well as default and payment terms, to establish the debt is bona fide. I briefly discussed this housing loan issue in a March 2011 blog post on prenuptial agreements. You may wish to review the blog to provide you with some prenuptial advice for your children. In a perfect legal world, where parents know they will fund the matrimonial home, a prenuptial agreement would be executed to exclude the matrimonial home. However, in the real world, when love is in the air, that is a rare occurrence.  

The decisions in the two cases below, provide impetus for parents to ensure any loans provided (at least in Ontario) to their children are valid. 

Case 1 – Poole v. Poole

In his 2003 paper "I Love You Son, But You Owe Me! - Gifts & Loans from Parents to Children”,  Brahm Siegel reviews the 2001 case of Poole v. Poole. In this case the court reduced the value of the debt a son owed his parents by 90%.

The facts of this case were as follows. The husband’s parents advanced $80,000.00 to the couple over the course of their marriage. Three promissory notes were signed by the couple. The money was used to help them acquire and pay off mortgages on various homes they owned during the marriage as well as pay off family debts. After they separated, the parents sent a letter to their son and his estranged spouse demanding repayment of the loan. They then sued both and the lawsuit was consolidated with the parties’ matrimonial litigation. The judge found the promissory notes constituted debts on behalf of both parties and should also be discounted by 90%.

Mr. Siegel summarizes why the courts found it “highly improbable” that the parents would ever call on the husband to pay his half of the debt.

The court’s findings were as follows according to Mr. Brahm:

1. The debts were 11 and 17 years old;
2. The parents never demanded payment except for the demand that led to the litigation which was motivated by a desire to collect from the wife;
3. The parents advanced the money to the parties to help them out and it was not anticipated it was to be repaid until they could afford it and until the parents needed it;
4. The husband’s mother admitted that but for the separation they would not have demanded payment and commenced the litigation;
5. The husband had not made any payments on the loan since separation.

However, because the court could not say with certainty that there was no possibility whatsoever of the husband having to repay, the value of the debt was reduced by 90%. 

Case 2 – Cade v. Rotsein

In a blog by family lawyer Andrew Feldstein, he discusses a similar case, Cade v. Rotsein. Mr. Feldstein wrote the following summation of the case.

“In the case of Cade v. Rotstein, 2002, affirmed on appeal 2004, the Husband claimed that advances totaling some $200,000.00 made to him by his parents during the course of his marriage to the Applicant constituted loans. The advances were made over a period of approximately 13 years to assist the Husband and Wife in their acquisition of family residences and were captured in promissory notes signed by the Husband. […] Specifically, he noted that a debt serves to reduce the debt claimant’s net family property such that any equalization payment the spouse, who claims the debt, may owe the other will accordingly be reduced (an equalization payment is defined as one half the difference between the parties’ net family properties). The trial judge then went on to adopt the approach endorsed in the earlier case law: the value of the debt to be attributed to the debt claimant should be discounted to reflect the reality of whether the claimant will be called upon to pay the debt. Based on the facts before him – the debts were old and no demand had been forthcoming on these debts prior to the separation of the Husband and Wife and the Husband’s father testified that he would not look for the money nor take legal action against his son to recover the money – the trial judge concluded that only 5% of the face value of the debts should be included in the Husband’s net family property.”

Mortgage and Promissory Note Limitation Periods

Another issue to consider is that when you execute a promissory note or obtain a mortgage there are various limitation periods that can nullify these documents. It is possible that if a limitation period has expired, the loan or mortgage will not be legally enforceable and the child may not be able to deduct the loan/mortgage from their net family property.

In summary, it is imperative that parents get proper legal advice to understand how to ensure a loan will be a valid debt (which may require the child to repay some of the loan each year and/or pay interest on the loan) under the FLA (at least in Ontario) and will count as a reduction of the net family property of their child. I have confirmed with a family lawyer that these older cases are still considered valid and care must be taken in regard to family housing loans.

Bloggers Note: I am not a family lawyer. This blog post should not in any manner be considered as legal advice. This post is a warning for any parent considering making a housing loan or for any parent who has already made a housing loan, to seek legal advice. 

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.

2013 Federal Budget

The Federal Minister of Finance, Jim Flaherty, today presented the 2013 Federal Budget. While there are no changes to corporate income tax rates, there is an increase to the personal income tax rate on non-eligible dividends paid by most private corporations out of active business income. There is no change to the taxation of eligible dividends paid by most public corporations.

Small corporate business owners planning to sell their business got a pleasant surprise in the budget when Mr. Flaherty increased the capital gains exemption for qualified share sales to $800,000 from $750,000 effective for 2014.

The Finance Minister seemed somewhat preoccupied with closing tax loopholes and stopping international tax evasion and ensuring compliance with the filing of the Foreign Verification Form T1135. To that end, the CRA will launch the Stop International Tax Evasion Program, or the more appropriately named “International Snitch Program”. Under this program, the CRA will pay rewards to individuals with knowledge of major international tax non-compliance when they provide information to the CRA that leads to the collection of outstanding taxes due. The CRA will require the outstanding tax liability to be in excess of $100,000 before entering into such a contract. The reward will provide for payment of up to 15% of the federal tax collected.

Therefore, please be advised, I will not be writing my blog anymore as I will be compiling my snitch list and retiring to Barbados on my 15% reward earnings (Just joking CRA, I have never met or heard of an international tax evader).

I provide a link to my firm, Cunningham LLP's budget summary (which I helped write) for those who want details of the budget.

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.

Stress Testing Your Finances and Your Death - The Comprehensive Test

Bloggers constantly strive for a unique idea or concept that gets people thinking, talking and even taking action. While I am not sure if my blog post on stress testing your death was unique or not (it was certainly morbid), it definitely seemed to strike a chord with many readers. I am honoured that in the weeks and months following that post a number of writers and bloggers decided to join the bandwagon to tackle this issue, adding different perspectives and expanding the concept from postmortem, to include antemortem (before death) issues.

Those articles and blogs included:

Roma Luciw of the Globe and Mail (Why you should stress-test your finances for a sudden death)
Ellen Roseman of the Toronto Star (Time to stress test your crisis readiness)
Mark from the blog My Own Advisor (Personal Finance Stress Test)
Michael James on Money (Stress-Testing your Personal Finances)

Ellen commented in her article that “Goodfield talks about the need to take precautions against sudden death. But you may be unable to take care of your finances while still alive because of illness, injury or advancing age.” The financial stress test, created by Mark, the writer behind the blog - My Own Advisor, deals with your financial well-being while alive. After considering both articles, I concluded my initial post was too limited in scope. A comprehensive financial stress test must take into account significant events that can occur while you are alive (loss of job, health and disability issues, financial loss) together with whether you have prepared your spouse postmortem to move forward financially with the least amount of stress and disruption to his/her life.

As I embarked on today’s post, I was startled by a simple yet seemingly evident revelation; antemortem and postmortem issues are so intertwined, that if you complete the specific set of tasks and summaries in my antemortem test, you will have almost everything in place to ensure your spouse is equipped to move forward financially in an almost seamless manner in the event of your death. Essentially, all that will remain is for you to discuss the preparations you have made with your spouse. The comprehensive stress test outlined below, ties this all together.

Antemortem Issues

The questions below make-up a relevant stress test for someone who is currently healthy, but also should be considered as Ellen noted, in the context of if you took ill, became temporarily or permanently disabled or were forced to slow down because of age. I have “borrowed” some of Mark’s stress test questions for the financial and administrative section. As noted above, many of the questions and tasks require you to put your finances in order while alive; so that you ease the burden on your spouse should you pass away.

Legal Documents

1. Do you have a will? If you have a will, is it up to date? If you own a private corporation, do you live in a province that provides for a secondary will?

2. Do you have power of attorneys for both your financial affairs and your health care?

3. Have you checked to ensure the beneficiaries of your RRSP, insurance policies etc. have been updated and are not a former spouse or someone you no longer wish to benefit from your death?

Insurance

1. Do you have sufficient life insurance to pay-off your debts, pay for your children’s education and allow for your spouse and children to live in the style, or close to the style, they are accustomed to?

2. Do you have disability insurance? Is the policy definition of disability narrow and you are paid if you can’t continue with your own occupation or is the definition wide ranging and you are only paid if you cannot work at any occupation?

3. Have you considered critical illness insurance? This is popular with many professionals.

4. Do you have shareholder buy/sell insurance if you own shares in a company?

5. Have you considered covering any capital gains your estate may incur upon your death through insurance? For example: if you have a cottage with a large capital gain and wish to keep it in the family, you may want to buy an insurance policy that is equal to or greater than the expected tax liability on the cottage.

Financial

1. Are you spending more than you earn today?

2. If your income dropped by 50% for 6 months what would you do?

3. If you needed more income what would you do?

4. Do you have access to money if you need it in an emergency (line of credit, savings account)?

5. If you had to retire today because of illness, could you financially adapt?

6. What portion of your monthly living costs are fixed such as car leases, mortgage payment, loan payments and what portion are variable/discretionary and could be eliminated or cut on short notice?

Taxes

1. Do you own U.S. property? Have you considered your potential U.S. estate liability and/or planned for it?

2. If you have a business, have you considered an estate freeze and/or how you will transition your family business?

3. Will you have a large income tax liability upon the later of your death and your spouse's death; because of unrealized capital gains on a rental property, cottage or shares in private companies? If yes and you do not buy insurance as discussed above, how will this liability be funded without a fire sale on the above noted properties?

Retirement

1. Do you have a retirement plan, even if just an excel spreadsheet? Do you have any idea of what you expect your monthly expenses to be upon retirement?

2. If you are near retirement, have you considered the various options in regard to taking CPP early or delaying it?

3. Have you considered how to smooth your income between the time you retire and you are forced to withdraw money from your RRIF?

Administrative

1. Have you prepared an information checklist for your executor(s)/spouse? Does it list all assets (bank accounts, investments, real estate, other) you own? Is the list up to date? It is essential that the list be complete, you do not want an after death game of Where are the Assets? This list can be paper, but I also suggest a back-up PDF be scanned into a secure computer directory.

2. As I discussed in my blog on Memory Overload, the use of multiple passwords is so prevalent that you should consider making a list of your key passwords for your spouse that is put into a secure, but accessible location. The objective of this exercise is to ensure your spouse will not be locked out of your various financial accounts because he/she does not know all the passwords.

3. Consider any accounts, safety deposit boxes, safes, etc. your spouse is or is not aware of. There are various reasons why one spouse does not make another spouse aware of some of these items. However, the reason for their existence is not relevant; what is important is that you somehow ensure that someone will become aware of the existence of these accounts or safety deposit boxes if you die be it your spouse, friend, family member or business partner.

4. A digital asset many people forget to deal with are loyalty points for travel ("Heir Miles") and retail specific loyalty programs. You should ensure you have a list of all loyalty programs you are enrolled in and the number you have been assigned. Most travel programs and some retail programs allow a transfer of some kind, upon a spouse/family member death. 

5. Do you have a list of emergency contact information for your doctor, lawyer, accountant, investment advisor, banker, etc.?

6. Have you prepared a summary of all insurance policies you have? This summary should be in an excel spreadsheet and list: the policy number, the insurance company, the type of insurance as well as the value of the insurance and staple it to the front of your insurance folder. Again, you may also want to create a special password protected file on your spouse’s computer that contains this summary information.

7. Have you informed your executors they have been appointed?

Postmortem Checklist

I wrote the initial stress test post because of my first-hand experience watching my mother cope financially with my father’s sudden and early death. In my mom’s case, she was able to lean on me to help sort out many of the applicable financial issues. Luckily, my father had at least dealt with the two most important post-mortem issues: (1) having a will and (2) having life insurance. But there was no discussion between my parents about their financial affairs before his untimely death and no lists for my mother to rely upon.

The checklist below is most relevant if you were to pass away. However, if you were to be disabled or lose capacity, some of the items in the checklist would be just as relevant. Though post mortem based, I suggest you deal with the tasks and issues below while alive. Dare I say, to do otherwise is selfish. For those of you that think this is a harsh statement, check out this New York Times article detailing the financial aftermath on Chanel Reynolds after her husband was killed riding his bicycle (Thanks to the Canadian Capitalist for this timely link).

Furthermore, I suggest that you actually stress test the checklist below by physically showing your spouse the locations of lists, computer files, insurance policies, password accounts etc. You will probably want to do a bi-annual walk through. As my wife was still asking me “where did you say you put this again”, we created a safety deposit back-up.

For those keen of eye, you will note the list of questions which in my original post were "do you have", changed to "do you know where". This tweak is based on the assumption you will undertake the antemortem test and follow through with the associated tasks and summaries. Thus, heaven-forbid you pass away; your spouse will have all the information at his/her fingertips and will not need to play a game of lost and found with your important financial documents.

The List:

1. If you have prepaid your funeral or have certain wishes, your spouse must know these wishes and where any related legal documents or invoices are located.

2. Your spouse must know where to find a copy of your will and power of attorneys and the contact information for your lawyer.

3. Your spouse must know the location of the paper or computer file containing all your insurance policies and a summary of the insurance details as discussed above.

4. Your spouse must know the location of the paper or computer file containing a summary of all your assets.

5. Your spouse must have a summary of your key passwords; these must be secure, but easily accessible.

6. Your spouse must know where you have an emergency contact list.

7. Your spouse, family member or friend must know where to find the key(s) to your safety deposit box(es) or any safe you utilize.

I promise; this is the last I have to say on this topic. I strongly urge you to take this comprehensive test for the sake of your loved ones.

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.

The BBC and the Globe and Mail

I would like to thank Roma Luciw and Dianne Nice of The Globe & Mail for featuring me in an article and online chat respectively this past Wednesday.

I really enjoyed Roma's article on Ten tax related things that leave Canadians stumped, as there are numerous income tax provisions and tax policy decisions that really leave one shaking their heads when preparing their personal income tax return.

Do you have any head scratchers in relation to filing your personal income tax return? If so, please provide it as a comment to this post. You will feel better venting and you may provide me with a topic for a future blog post.

Dianne and I discussed Tax Tips for Investors. There were some excellent questions. The link provides a recap of the entire chat. You may want to take a quick read to see if there are any answers that are relevant to your income tax situation.

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.

New Will Provisions for the 21st Century – RESPs

I recently had lunch with Katy Basi, a lawyer whose practice focuses on estate and will planning, taxation and other estate related areas. One of the topics we discussed was what issues lawyers fail to consider when drafting wills these days (that passes for exciting lunch discussion for an accountant and a lawyer). I immediately asked her if she would like to write some guest blog posts on these issues and Katy agreed to do so.

So today, without further ado, Katy discusses how many wills are drafted without consideration of RESPs.

New Will Provisions for the 21st Century – RESPs 

By Katy Basi

I have reviewed numerous wills in my practice as a wills and estates lawyer. Some were dusty with age, while others were signed fairly recently, but had evidently been drafted from a 20th century precedent. Thanks to the generosity of The Blunt Bean Counter, over the next few months I’ll guest post on a few 21st century estate planning topics, including digital assets and reproductive materials. Today’s topic is Registered Education Savings Plans (“RESPs”).

Are you the subscriber under an RESP? If so, you should have an RESP provision in your will, full stop. (My focus in this blog is on individual and family RESPS, not on group plans, though group plan subscribers should also have RESP provisions in their wills!)

An RESP is a contract constrained by numerous provisions of the Income Tax Act (Canada) (the “ITA”). Many of my clients assume that their children (as the beneficiaries under their RESP) would automatically receive the RESP upon their death, just as if the children were beneficiaries under their Registered Retirement Savings Plan (“RRSP”). This assumption is, for the most part, dead wrong. While an RRSP collapses upon the death of the holder, an RESP contract generally provides that the contract survives the death of the subscriber.

The subscriber of an RESP has a great deal of control over the RESP, so the relevant question on his death is…who is the new subscriber?

Your lawyer drafting your will should ask you whether your spouse is a joint subscriber under your RESP. While not appropriate for all situations, having both spouses as joint subscribers is generally a smart move, as the RESP assets do not then fall into the estate until both spouses are deceased. This in turn may reduce both the estate administration tax (aka probate tax) payable on the death of the first spouse, and the likelihood of creditors of the first spouse making a successful claim against the RESP assets.

Even with joint subscribers, a new subscriber is still required when both spouses are deceased. The identity of the subscriber is critical for many reasons:

(i) The subscriber makes all investment decisions for the RESP.

(ii) The subscriber decides when amounts will be withdrawn from the RESP, how much they are, and whether the amounts are identified as a return of contributions (not taxable) or an educational assistance payment (taxable to a beneficiary under the RESP, as it consists of accumulated income and/or government grants).

(iii) Subject to the terms of the RESP contract, a subscriber may require a return of contributions be paid to himself, rather than to the beneficiary.

(iv) The subscriber receives all income and capital remaining in the RESP if the RESP has to be collapsed because the beneficiaries have not enrolled in qualifying educational programs within the prescribed time limits.

So what should the RESP clause say? The clause will appoint the new subscriber, of course, and it often gives the new subscriber:

(i) directions concerning how to manage the RESP,
(ii) the ability to fund the RESP out of the estate, and
(iii) the discretion to collapse the RESP if necessary.

The new subscriber might be the executor, another family member, or a testamentary trust set up in the will for the benefit of the same child who is the beneficiary under the RESP. The last option is helpful in connecting the intended source of the funds for the RESP (being the money held in the testamentary trust) with the person in charge of the RESP (being the new subscriber, ie the testamentary trust itself).

Let’s take the simple case of a sole surviving parent (“Dad”) leaving the residue of his estate to his only daughter, who is entitled to 10% of the residue at age 21, 50% at age 25 and the remainder at age 30 (this structure would usually qualify as a testamentary trust). Without an RESP provision, would the daughter be entitled to claim 10% of the RESP at age 21? What if the daughter was not enrolled in a qualifying educational program at that time? Government RESP grants may need to be repaid, and penalty taxes may be levied on any income payments made out of the RESP. It would be a very expensive 10%.

What if Dad’s executor is a trust company? The trust company may require a specific RESP provision to be in Dad’s will. For example, the RESP provision may require the new subscriber to be the parent of the RESP beneficiary (if there is a parent still alive), the beneficiary herself (if she is over the age of majority – of course, this is akin to giving her the keys to the safe), or the guardian of the beneficiary (if the beneficiary is still a minor). Otherwise, the trust company might automatically become the subscriber, due to its status as executor of the estate – and the trust company may not want that responsibility.

So, our simple case was not so simple after all – but it could have been worse! An even messier example follows. Grandfather funded an RESP during his lifetime for the benefit of his grandchildren. Under his will, Grandfather left half of the residue of his estate to his good friend Mavis, and the other half to a charity. Will Mavis and the charity demand that the RESP be collapsed and the RESP funds added to the residue, with all of the inequity and nasty tax consequences that would result? Grandfather would roll over in his grave – he needs an RESP provision in his will.

To avoid family members, executors, lawyers and RESP providers spending valuable time and energy addressing such untenable situations, make sure that your will has an RESP provision too!

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estate planning, estate administration and income tax law. Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@katybasi.com. More articles by Katy can be found at her website, katybasi.com.


The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

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.

Tax Tweets of the Day for the Week Ending March 8, 2013

My Twitter tax tips for this week are listed below. My twitter handle is @bluntbeancountr. That's it for my tax tips. I am done for this year. I hope there have been one or two tips that were beneficial.

Online Chat - Globe and Mail

I will be participating in a live online chat with Dianne Nice of The Globe and Mail on Wednesday March 13th at 12:00. The topic will be Tax tips for investors. The link to join the chat is here. Please feel free to join the chat and ask a question. Dianne is taking some questions prior to the chat if you wish to send in a question beforehand. Let me know if you are a reader of The BBC.

If you join the chat, I would appreciate questions that are reasonable to answer online given the time constraints as opposed to "Mark, I have a hedged account in Singapore in U.S. dollars on which I have covered calls in German Marks and I wish to monetize the account. Will it work?

Tips for Week of March 4 - March 8, 2013

If you have a Line of Credit for investment purposes, check your December, 2012 statement for a summary of interest paid in 2012 & claim the interest expense. #blunttaxtip

Did you own foreign property with a cost of over $100,000 at any time during the year? If so, file Form T1135. #blunttaxtip

Note: Check out this post on foreign income reporting by My Own Advisor.

If u sold a US stock in 2012, use the F/X rate from the yr of purchase to determine cost; use 2012’s average or actual rate for the proceeds. #blunttaxtip

Did you sell a REIT in 2012? Reduce the ACB by the return of capital from prior years. #blunttaxtip

Last tip of the year. Don’t file late no matter what! There’s a 5% penalty + another 1% per month up to 12 months. #blunttaxtip

Note: Even if you cannot afford to pay the tax due, file your return to avoid the penalties. You can usually make arrangements with the CRA to pay off your tax liability over time if you provide reasonable terms of repayment.

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.

Suggestions and Strategies to Facilitate the Tax Preparation Process for You and Your Accountant

The Blunt Bean Counter

Last year I wrote a tongue-in-cheek post “The Top Ten Accountant Pet Peeves about Personal Income Tax Season”. One of my long-time readers, who uses the pseudonym Pursuit 99, made the following comment on that blog post: “Thanks for the heads up on what not to do. It really is helpful. Now, how about a list of ten specific solutions or strategies that really benefit the process of personal tax completion for both you and the client.”

Pursuit 99, your wish is my command. Today, I will provide an accountants dream list of actions, forms and summaries that will benefit the tax preparation process for both the client and his/her accountant. Please excuse the overlap between todays post and the Pet Peeves post.

The list below requires the client to do extensive summarizing and organizing. I have a feeling some people after reading the list are going to be saying to themselves, “Pursuit 99 said what can be done to benefit the client and their accountant, not just their accountant.” However, there is an art to preparing a tax return as certain items require subjective decisions. You want your accountant to be spending his/her time making these decisions, not adding up your telephone bills. 

How to Become your Accountants Favourite Client

1. Provide your accountant a summary page of what forms and slips you have included in your tax package. You would be surprised how often there are disagreements as to what was received from a client. This summary keeps both sides accountable for information flow and retention.

2. Do not send a shoe box. Many accountants will not accept shoebox clients. I personally would be concerned about any accountant that does, since they are not spending time on what is important. In my opinion, any accountant who lets their clients bring in a shoe box every year is clearly not concerned with ensuring an efficient tax preparation process.

3. Open any envelope containing an income tax slip at home and do not send your accountant unopened envelopes. Do you really want to be paying your accountant to open envelopes? Also, if you have a cranky accountant like me, you have started off on the wrong foot.

4. Don’t send junk. Separate real tax slips from things like RRSP & TFSA application forms, monthly investment account statements for RRSP and RRIFs, last year's Efile form and last years actual return. If you are unsure, send the form, but don't send everything just because you are too lazy to sort through your tax papers. By the way, your accountant does not need a copy of last year's return, it is on their computer.

5. Advise your accountant upfront about any changes in your personal situation. The birth of children, address change, marital changes, extramarital affairs (just kidding, although this may explain why you have less investment income this year).

6. Summarize and total donation and medical expenses. Your accountant will review all donations slips to ensure they are deductible and all medical expenses to ensure they qualify and are deductible and have not been double counted (when there is an insurance plan in place). However, having a summarized total lets your accountant reconcile their totals with yours quickly.

7. Summarize capital gains/losses (if not provided by your financial advisor). This is a huge issue. Accountants do not have the time to figure out your gains and losses on 50 trades in the middle of tax season, let alone try and figure out the adjusted cost base for stocks you owned 10 years ago when you were not even their client. You either need to do this yourself, or engage your accountant to do this throughout the year so all your capital gains/losses are summarized before March. This is not to say you may not have specific questions regarding a cost base determination to discuss with your accountant. However, if you don't do the majority of the work, you will be charged an arm and a leg by your accountant for undertaking this task during tax season.

8. Make a copy of your 2011 T776 rental schedule and write the comparable 2012 numbers, excluding depreciation, beside the 2011 totals (or summarize your rental expenses on an excel spreadsheet). By undertaking this task, you will note any obvious discrepancies between the two years, which you should review before providing the information to your accountant. This exercise benefits your tax return process as instead of adding up rental expenses, your accountant can now concentrate on contentious issues such as whether a large rental repair is an expense or capital addition.

9. The same holds true for the T2125 or T2032 business and self-employment statements. Provide your accountant a summary of the income and expenses and a list of any questions you had in putting the numbers together. Your accountant can then spend time reviewing the numbers and asking questions rather than adding up a bunch of receipts.

10. If you do not keep an automobile log and are claiming car expenses for employment or business, at minimum, provide your accountant with your odometer reading at January 1st and December 31st. This quantifies your mileage driven during the year and will assist in the discussion as to what percentage of your automobile expenses were deductible in the year.

11. If you are claiming employment expenses, ensure you have obtained the T2200 Form from your employer and summarize your employment expenses for the year. The T2200 allows your accountant to review what expenses your employer says you incurred or were required to incur.

12. If you purchased a rental property during the year, provide your accountant with the purchase and sale agreement, statement of adjustments, legal fees and appraisal fees. This will save significant time on your file and ensure you get full benefit for all the initial costs incurred.

13. If your children are in University or College, ensure they download their T2202A tuition forms, since students can transfer up to $5,000 of tuition credits to their parents, but your accountant cannot make that determination without the T2202A form and your child's tax slips.

14. Don’t just tell your accountant your kids exceed the minimum $500 fitness amount. Obtain invoices and statements from the sports club, dance studio, etc. There is a good chance the CRA will request these forms to substantiate your claim, so ensure you have the correct numbers from the start.

15. If you are claiming child care, provide a copy of your Nanny’s T4. If you use daycare, provide a receipt that reflects payment for the year.

The above is a substantial list that requires significant time and effort on your behalf. However, if you provide most of these items, your fee should be lower and your accountant will have more time to spend minimizing your tax liability.

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.

Tax Tweets of the Day for the Week Ending March 1, 2013

My Twitter tax tips for this week are listed below. My twitter handle is @bluntbeancountr. Next week will be my last for tax tips.

As in prior years, I will again be posting Confessions of a Tax Accountant, starting in late March or the first week of  April. These posts highlight contentious and/or interesting personal income tax issues that arise in my practice during tax season that I think will be of interest to my readers.

Tips for Week of February 25 - March 1, 2013

File returns in the year your child turns 18.They maybe eligible for some claims at 18 & others at 19 are based on their age 18 return #blunttaxtip

If you sold capital property in 2012 that was held prior to 1994, review whether you elected to bump the value in 1994. #blunttaxtip

Note: In 1994 the $100,000 capital gains exemption was eliminated. However, you were entitled to make a final election to use your capital gains exemption on stocks, real estate etc. Many people forget they made such an election and that their cost base on certain property is higher, which reduces the capital gain to be reported. This election was used extensively by people on their cottages. So if your parents sold their cottage in 2012 remind them to check if they made the election in 1994.

There is no attribution on #Capital Gains if you buy stocks or capital property in your child’s name. #blunttaxtip

Do you pay investment counsel fees to an #investment advisor? If so, they are deductible. #blunttaxtip

If you receive a lump sum in 2013, considering making your 2013 #RRSP contribution early. #blunttaxtip

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.