Getting Organized to File Your 2013 Personal Tax Return

Following my six-part Retirement series, I have no energy left to put together any original thoughts. So, I am going to provide you a summary of the Twitter Tax Tips I posted last year to help you get organized for tax season. I will provide a similar summary for tax preparation tips in the next week or so.

Organizing Tips

1. Make a checklist of all the tax slips you expect to receive this year and follow-up any missing slips, no matter how small. This will help you avoid a 20% penalty when the CRA matches your tax slips next fall.

2. Medical expenses must evidence payment. Have the pharmacy, dentist, orthodontist, chiropractor, etc. provide you with a yearly summary receipt so you don't have to find the twenty different chiropractor receipts you had during 2013.

3. For each donation you made online, ensure you receive or request an official tax receipt. The online confirmations are not official receipts. To clarify; when you donate online, you receive a payment confirmation receipt (this confirmation receipt is not an official receipt) and often, a notice that the official receipt will be sent separately or must be downloaded. Many clients provide me the payment confirmation receipts and do not download the official receipt or request such.

4. If you incur expenses to earn employment income, request a signed Form T2200 from your employer.

5. University/College students must print their T2202a tuition forms issued by their school to claim or transfer tuition credits. Note: University students are notorious for not printing out their T2202a tuition forms and holding up the filing of their parent’s tax returns. These forms are sent by the Universities and Colleges to their student’s portals. Please remind, or in my case, harass your kids to print out the form and email it to you.

6. Ensure your children’s activity receipts are marked paid in full to claim fitness/arts credits.

7. Obtain capital loss, HBP, RRSP & TFSA limit info from your online CRA acct. or your 2012 tax assessment. Note: It is very important to ensure you have updated carry forward information for your capital losses. You want to ensure you claim the maximum amount of capital losses carryforward against any current year gains (it was a good year for the stock market, hopefully you had large gains, whether realized or not).

8. If you have self-employment or rental income, summarize the income & expenses now, so you’re not rushed and miss claiming expenses.

9. If you moved to a new work location in 2013 >40km away, gather & summarize your receipts to support the claim. Note: If you moved to a new job this year, it is very important to gather all your receipts for any expenses you incurred and summarize as required by the CRA. See form T1-M to understand what expenses are eligible and how the CRA wants these expenses aggregated.

10. If you use an accountant, send your information to them as early as possible, they will be very appreciative and have more time to review your return.

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.

Why Spend Your Energy Being Frugal? Just Tax Plan!

This past February, I had some fun with a top ten list (look below the sports agent's fees post) on why you should vote for me in a blogging contest (thanks to all of you who helped vote me into the second round of the contest!). In this list I took some shots at frugal blogs and got some emails from furious Frugalites asking me what I had against frugality and frugal blogs? I responded to a couple of emails saying that I don't have anything against frugal bloggers or frugal blogs in particular: my issue is that I think people are far too focused on cost savings,
as opposed to increasing income and/or minimizing income taxes.

As per this tongue and cheek blog I wrote titled “Old and Not Thrifty”, I admit I am not thrifty, although my wife counterbalances my lack of frugality with her ability to get a great deal. Notwithstanding my personal spending habits, any long-time reader of The BBC will know I often write about how important it is to budget and spend within your means and I reiterate this now – always be cognizant of what you are spending. However, in my opinion, if you budget well and are frugal, I think you reach a point of diminishing returns. So you save $12 on a cheaper toaster, or $1.29 on a box of cereal. Yes, those are savings, but they are immaterial in my mind once you have already proven to be a disciplined spender. Why not put all that energy into producing more income or saving taxes?

Before you start sending me hate mail, this post is not intended for those whose financial situations are such that frugality is a necessity, but for those of moderate or greater income who seem to get a little carried away with their frugal efforts when they could be making a bigger change in another manner.

I can already hear the cries of “Mark don’t give me the you should earn more lecture. I am stressed out as it is with my current job and life.” So, I won’t tell you to consider turning a hobby or an expertise into a side business or to spend some energy creating a case for a raise from your current employer or to spend your energy looking for a better job opportunity. Nope, I am going to give you some lazy tips from my past blog posts to save you significant money in taxes so you won’t have to worry about saving money on the daily fresh fish special (if you call a fish floating with one gill above the water, fresh).

I have reviewed my past blog posts to unearth three effective if not fairly effortless ways to increase your cash-flow:

1. Capital Loss Planning

I have written several times about capital loss planning (see the third paragraph from the bottom of the post, “Creating Capital Losses – Transferring Losses to a Spouse Who Has Gains) where you have a capital gain and your spouse has an unrealized capital loss. If your situation meets the criteria in my post and you have, say, a $10,000 loss and your spouse has a gain greater than $10,000, you could potentially save almost $2,500 by undertaking this form of tax planning. That is a lot of cheap rolls of toilet paper. The only caveat for this tip is that you should probably get some professional advice to ensure you do not get tripped up by the technical rules with superficial losses.

2. Form T2200

How about spending your energy asking or prodding your company to provide you with a T2200 Form that allows you to claim your employment expenses. Many employees are shy about requesting these forms and many employers are reluctant to issue these forms (because of the administrative hassle). If you incur expenses such as automobile costs, telephone or home office costs and are not reimbursed or only partially

reimbursed, ask or convince your employer to issue this form so you can deduct any of your employment related expenses on your 2013 personal income tax return. Depending upon the amount of employment expenses you have been personally absorbing, you may save enough for a vacation, which to me is a lot more exciting than saving some money on steaks that expire that day.

3. Income Splitting with Your Spouse

Income splitting can be as simple as spending the higher income spouse’s money on living costs and using the lower income spouse’s salary to invest, so any investment income is earned by the lower tax rate spouse. Alternatively, income splitting can be as sophisticated as utilizing a family trust or a prescribed loan, the rate is currently only 1%.

I have just briefly touched on a few simple opportunities to save money through tax planning. My point? Frugality takes a lot of time and effort, whereas many tax planning strategies require only a few hours of consideration. Even if you require an hour of time from an accountant to review your plan, the tax savings can be substantial.

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 Tips Tweet Summary & Child Disability Claims

This week I started tweeting daily income tax tips under the hashtag #blunttaxtip. The tweets were organizational in nature, to get you prepared to file your tax return. I have had an avalanche of requests to post these tips on my blog. Okay, two, but who is counting. 

In response to these requests, I will post a summary of my weekly tax tips each Friday until my tips have been exhausted or I become exhausted, whichever comes first. I am not sure how well tax tweets with a 140 character limitation translate, but I assume you will get the gist of the tips.

Tips for Week of January 22-25

Make a checklist of all the tax slips you expect to receive this year. Will help you avoid this penalty: http://bit.ly/W7PuCl #blunttaxtip

Medical expenses must evidence payment. Tip- Have pharmacy, dentist, orthodontist, chiropractor, etc. provide a yearly summary receipt. #blunttaxtip

Ensure for each donation made online, you receive or request an official tax receipt. The online receipts are not official receipts. #blunttaxtip [Note: To clarify, when you donate online, you receive a payment confirmation receipt (this confirmation receipt is not an official receipt) and often, a notice that the official receipt will be sent separately or must be downloaded. Many clients provide me the payment confirmation receipts and do not download the official receipt or request such].

If you incur expenses to earn employment income, request a signed Form T2200 from your employer. #blunttaxtip

Disability Tax Credit & Child Disability Benefit Claims

Over the past two weeks, the Big Cajun Man has been posting on his Canadian Personal Finance Blog about how to claim the disability tax credit and complete the disability tax credit certificate for a child and how to claim the child disability benefit. He also discussed how he received a refund for prior years by "back" claiming his son’s tuition expenses as a medical tax credit. If you have a disabled child or know someone who does, please direct them to his blog. 

For those who want a concise, but slightly dated overview of some of the expenses related to learning disabilities which are eligible for the medical expense tax credit, please see this article.

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.

Credit Cards - Tax, Budget and Repayment Issues

Today I want to talk about credit cards. In particular, I intend to discuss three issues.

1. The first issue being why you should consider having more than one credit card, despite the added annual card fees.

2. The second being how despite the credit card companies best intentions, they often come up short when trying to help their cardholders track their spending habits.

3. Finally, the ludicrous minimum balance repayment reminder.

I currently have three credit cards in my wallet. I use a CIBC Aerogold for my personal expenses and to accumulate Aeroplan points. I also have an American Express card I use for any expenses I consider business in nature that my firm does not reimburse me for (such as auto). Lastly, I have a BMO MasterCard that I use strictly for my firm Cunningham LLP’s business related expenses. 

Income Tax Simplification

The main rationale for having three credit cards is that they stream my expenses neatly into personal expenses that are not deductible for income tax, personal expenses that are deductible for income tax and business expenses that are deductible for income tax. Should I be audited, I will simplify the auditor’s life and hopefully give them no reason to re-assess me. If you do not have your own business, you may still want to consider a second card if you have significant employment or commission expenses you wish to segregate.

Many of my clients are mesmerized by their Aeroplan or similar travel plan points and use one card for their personal, employment and/or business expenses. This is an audit nightmare waiting to happen and will cause most auditors to automatically get their backs up that you are trying to expense personal expenses, even if that is not the case. Thus, I always suggest that my clients stream their expenses through multiple credit cards or at minimum two cards. The obvious downside to this attempt to keep the taxman happy is that it is detrimental to your point accumulation; although as per this blog on taxable benefits, you must be careful to adhere to the CRA rules.

The same concept holds for Lines of Credit (“LOC”). Where possible, always obtain two LOC’s, one for personal use like home renovations, trips and cars and one for investment or similar loans. The clear streaming minimizes audit time and potential reassessments. If you cannot obtain two LOC’s, ensure you clearly track and breakdown all advances between personal and investment uses and allocate the interest based on what proportion of the total LOC owing is investment use.

Tracking Credit Card Spending

On my Aeroplan card, Visa has attempted to help me, by categorizing my expenses for the month on the last page of my statement. I think this could be a very useful and practical idea, but only if Visa took the categorization a step further and provided a few more categories. For example, my wife and I always want to know how much we spent on groceries in any given month, but the grocery costs are lumped together with retail purchases and not easily determinable. Anything in $US is considered foreign currency; however, within the foreign currency category, I really want to know how much is travel or vacation spending versus retail purchases. Hotel, entertainment and recreation are also lumped together. Stuff like this drives me crazy. It is so close to being useful, but just far enough away to be useless. I would like to know if Visa asked its users for input on devising the categories, as just four or five more would have made this a useful report – at least for me.

Minimum Payment Information

Lastly, has anyone looked at the reminder on the last page of their Visa statement? On a recent Visa bill which included the costs of my 25th anniversary vacation, I noted a reminder on the last page that said “If you only make the minimum payment every month, it will take approximately 95 years and 9 months to pay the entire balance shown on this statement.” Talk about long-term debt! (Blogger's Note: In the comment area below, Sacha Peter, who is the blogger behind the Divestor blog, notes that the minimum payment information became a statutory requirement for credit card companies in 2010).

For some people, ensuring they maximize their travel points is an obsession. However, I suggest you consider the benefits of free travel rewards against a potential tax reassessment and the time and aggravation of an audit the next time you use your only credit card. As for the budgeting aspect, the credit card companies need to go back to the drawing board; in my case I can wait 95 years until they get it right.

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 Taxation of Automobiles

As discussed in my early January blog Mitigating Your Exposure to Five Popular Canada Revenue Agency ("CRA") Audit Target Areas, automobile expenses are often audited by the CRA and are one of the most contentious items in any review or audit. In my opinion, there are two reasons for this: (1) auto expenses are a fairly simple income tax concept and therefore easy to audit even for inexperienced CRA auditors and (2) auto expenses are an easy target because people do not properly document the business usage of their automobile and thus leave themselves at the mercy of an auditor.

Employees

In order to claim automobile expenses as an employee or commission employee, your employer must complete Form T2200-Declaration of Conditions of Employment. You can then claim your automobile expenses on Form T777  less any non-taxable reimbursements or allowances, to the extent your car is used for business purposes, as discussed in greater detail below. 

Self-Employed Individuals

Similar to employees, most self-employed people typically compile 100% of their gas receipts, repairs expenses, insurance premiums, toll highway fees, car washes and lease costs when organizing and gathering their information for personal income tax purposes. This full claim is then reduced, often after discussions with their accountant, by the personal portion of their automobile usage. For example, if your total automobile costs and expenses are $10,000 and you drive your car 75% of the time for business and 25% of the time for personal purposes, you would report $7,500 for your auto expense claim.

Corporations

If your business is incorporated, the automobile expense issue is more complex. A decision must be made as to whether to own or lease the car in the corporation or whether to own or lease the car personally and charge back the corporation for business use. In the case where you pay 100% of the expenses for your personal car in the corporation, your accountant will typically make an entry to reduce the corporate auto expense by your personal usage ($2,500, using the above example) and charge your shareholder loan for your personal use. Alternatively, if you pay 100% of the auto expenses personally, your accountant will book an entry to increase auto expenses for your business use ($7,500 using the example above) and either have the corporation reimburse you for $7,500 or credit your shareholder loan for the $7,500 of business related costs you paid personally.

In order to avoid the standby charge discussed below, my firm typically does not recommend the purchase or lease of an automobile by the corporation, unless the automobile is used almost exclusively for business and can be documented as such.To be clear, I am not talking about a van, truck, etc. that is used 100% for business purposes, but a car that you drive essentially all the time, both personally and corporately.

Employer Owned Automobiles - The Dreaded Standby Charge

If you are an employee or a shareholder of a corporation that owns or leases the car that you use, you may have an employment benefit called a standby charge. Each year, the standby charge is calculated as 24% of the cost of the car, if the car was purchased, or 2/3 of the lease costs, if the car was leased. In addition, there could be an additional benefit for the operating costs, equal to ½ of the standby charge (if business use is 50% or greater) or 26 cents (for 2012) for each personal kilometre driven. As noted above, the benefit is always 24% of the original cost of the car, even as the car declines in value. Thus, consideration should be given to purchasing the car after three or four years where possible.

If your personal usage of a corporately owned vehicle is low relative to the business usage, there is a possible reduction in the standby charge. Where you drove primarily for business (>50%) and your personal usage km were less than 1,667 km a month or 20,004 km a year, the standby charge is calculated as follows:

Personal use kilometres/ (1,667 x the number of months the car was available to you) x the original standby charge calculated (24% x the original cost of the car or 2/3 the lease costs).

Essentially, the lower your personal use kilometres, the greater the reduction in the standby charge. Based on the formula above, once you reach 20,004 personal km the reduction is eliminated.

Business vs. Personal Usage

For individual and corporate taxpayers who claim a deduction for automobile expenses, the percentage of business use versus the percentage of personal use is often subject to a challenge by the CRA. As support for the relative percentage usage, at a minimum, I always recommend that the taxpayer note the car’s odometer reading as at January 1st and again on December 31st. The reason for doing such is that at least the quantum of kilometres driven in a year will be clear to the CRA reviewer or auditor. The best evidence to support the business use kilometres for purposes of an automobile expense claim is a log book which denotes the client or customer driven to and the number of kilometres the trip took; however, very few people maintain such detailed records. Many people often have to scramble to build a log book by going back up to three years and using their Outlook calendars to rebuild their driving records when asked by the CRA to support their business usage claim. This is not a fun exercise.

Depending upon the auditor, you can sometimes negotiate an agreed upon business/personal usage rate without a logbook; however, where the auditor agrees to this approach, it always results in a reduction of the business use claim by the taxpayer.

The CRA now offers to give some consideration to a log book for a sample period where there is one year of detailed record keeping. The following is what the CRA says in regards to a sample logbook:

The CRA would be prepared to afford considerable weight to a logbook maintained for a sample period as evidence of a full year's usage of a vehicle if it meets the following criteria.

The taxpayer has previously filled out and retained a log book covering a full 12-month period that was typical for the business (the “base year”). The 12-month period is not required to be a calendar year.

A logbook for a sample period of at least one continuous three-month period in each subsequent year has been maintained (the “sample year period”).

The distances travelled and the business use of the vehicle during the three-month sample period is within 10 percentage points of the corresponding figures for the same three-month period in the base year (the “base year period”).

The calculated annual business use of the vehicle in a subsequent year does not go up or down by more than 10 percentage points in comparison to the base year.

In Summary- Documentation is Vital

Claiming and documenting automobile expenses is a tedious and time consuming process. However, if you are ever audited, you will be thankful you undertook the effort.

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.

Common Personal Income Tax Errors

In today’s blog, I will discuss some of the more common personal income tax planning and personal income tax tracking errors I observe as a tax chartered accountant. Most of these planning and tracking errors are very subtle in nature. Many taxpayers utilize income tax software programs to prepare their personal income tax returns; I would suggest that these programs would not necessarily bring these matters to your attention, as the issues are not input based.

The following are common errors I observe on a consistent basis:

Transfer of investments with unrealized losses to a RRSP

Where you transfer an investment with an unrealized loss to your RRSP as a RRSP contribution, the capital loss on the disposition to your RRSP is disallowed. For example, if you bought shares of Research in Motion for $50 and transferred it from your non-registered trading account to your RRSP when the value was $35, the $15 capital loss would be denied. I have seen taxpayers claim this capital loss when they are not entitled to do so. Thus, you should be extremely careful to ensure you do not transfer any investments with an unrealized capital loss to your RRSP.

Spousal RRSP

A spousal RRSP counts as a contribution by the contributor. If Jennifer has a RRSP contribution limit of $18,000 and contributes $18,000 to her husband Tom’s RRSP, she receives the $18,000 income tax deduction and cannot contribute to her own RRSP. If Jennifer contributed $12,000 to Tom’s RRSP, she can only contribute up to $6,000 to her RRSP. The combined total cannot exceed her $18,000 RRSP limit. However, I often see people misinterpret these rules and make total contributions that exceed their RRSP contribution limit.

T3 income tax slips

These tax slips may contain an amount indicated in Box 42. This box relates to the return of capital on income trusts and similar investments. The amount in Box 42 indicates the amount of tax-free distributions received during the year and must reduce the adjusted cost base of the related investment. Many people do not keep track of their reduced adjusted cost bases. For example, if you purchased an income trust or similar investment for $14 in 2010 and the amount in Box 42 in the 2010 T3 slip is $1.50, the new adjusted cost base of that investment would now $12.50. If you were to sell the investment in 2011 for $15, the capital gain would be $2.50, not $1.

Depreciation on rental properties

A very subtle but significant error is in connection with rental properties. Many people purchase rental properties with friends or relatives and do not give any consideration to signing a partnership or joint venture agreement in regards to the property. This is a complicated legal issue, however, for income tax purposes, if the property is a partnership, the capital cost allowance [(“CCA”), known to many as depreciation for tax purposes] must be claimed at the partnership level and thus, the partners share in the CCA claim. However, if the property was purchased as a joint venture, each venturer can claim their own CCA, regardless of what the other person has done. (I will discuss this issue in greater depth in an upcoming blog on the income tax implications of owning a rental property).

Joint bank accounts

Many spouses arbitrarily open bank and investment accounts in the names of both spouses even though only one spouse may have earned and contributed all or the majority of the funds. This may lead to incorrect tax reporting results. For personal income tax purposes, technically, the spouse who earned and contributed the money to the account originally should report 100% of the interest, dividends or capital gains that are earned in that account on the original amount (there is no attribution back to the contributing spouse on the income earned on the income (i.e. “secondary” income). This is not necessarily what I see happening in reality.

Car expenses and home office related to employment

Many employees require their cars for work or are required to maintain a home office. Should you fall into either of these categories, you should ensure you get your employer to sign Form T2200, which will enable you to deduct these costs as employment expenses. Often, when I ask whether a taxpayer if they have obtained the Form T2200, they answer no.

Interest expense

Many people use their line of credit to borrow to make investments. The interest on these monies is typically deductible for income tax purposes. However, many people also use their line of credit for personal expenses, thus, mixing non-deductible personal interest expense with deductible investment interest expense. Where this is the case, you should track the amount the principal amount of the line of credit used for the investments on an excel spreadsheet for back-up in case of an audit by CRA. For example, if you took out $15,000 on your line of credit to make an investment, and the total line of credit balance is $100,000, you should allocate 15% of that month’s interest to your deductible interest expense. Any repayments to the line of credit must be prorated between the personal and non-personal amounts outstanding and cannot be allocated in whole to one or the other. Taxpayers often believe that they can apply the full repayment to the personal portion of their line of credit and therefore can claim a higher interest expense deduction for personal tax purposes.

1994 capital gains election

In 1994, the $100,000 capital gains exemption was phased out. However, individuals were eligible to make an election on their 1994 personal tax return to bump the value of their capital properties by up to $100,000. Many people made this election on their cottages and stock investments and never informed their children. Where the parent ages and forgets about this election or in some cases passes away, the children may not be aware of this election and the estate can pay more income tax than is necessary.

Tax planning does not always mean NO tax

The errors noted above are actual physical income tax planning errors. However, the biggest error committed by many people, is more mental than physical; when they attempt to reduce their income tax bill at any cost. As discussed in my blog The Income Tax Planning dog, wagging the Tax Dodge, this philosophy can often be at a significant personal detriment. 

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.