It’s Personal Tax Time – How to Get on Your Accountant’s Good Side

Many readers of this blog use accountants to prepare their personal income tax returns. You can take three approaches in working with your accountant. You can provide them with:

1. all the detailed information they request
   
   
2. most of the information, without overly exerting yourself
   
   
3. the minimum information, since you pay good fees

From a client perspective, all these approaches are reasonable to some degree. However, as a retired public accountant of 35 or so tax seasons, I suggest you lean towards approach number one, to the greatest extent you can.

I say this for two reasons. The first reason is simply the better organized you are, the more time your accountant can spend dealing with minimizing your taxes. The second reason is that many Canadians invest in mutual funds (T3 slip) and limited partnerships (T5013 slip). Both these investments have March 31st deadlines for issuing the T3’s and T5013’s, so clients often have to wait until late March and early April to receive their slips.

Consequently, your accountant’s workload has likely changed substantially over the last five to seven years, such that 45-60% of the client information comes in after say April 7th. In the good old days, that number was likely only 25-35%.

I am not expecting you to shed too many tears about your accountant’s working conditions given the fees you pay them. I am telling you this because the easier you make it for them to work on your return (rather than chase information), the better it is for you.

So, with the theme of be nice to your accountant, I list below some do's and don'ts for providing your tax season information to your accountant. 

I will start with the things you want to avoid doing.

Tax Season Don'ts

1. Do not hand your accountant all your tax slips in the original envelopes 
   
   
2. Do not send your accountant PDF’s of each tax slip as they arrive. If you prefer to use email or your accountant has a portal (in lieu of paper copies), try to send a first batch of as many initial slips as possible. Then make a list of what you think is missing (such as T3’s, T5013’s, straggler donation slips) and send a second batch all these slips. Once that is done, it is fine to send amended or straggler slips one by one 
   
   
3. Do not provide your prior years tax returns and tax slips to your accountant. All tax programs have prior year information carried forward if required and most accountants have paperless systems of prior years slips if a past tax slip is required for any reason 

Tax Season Do's

1. Provide your accountant any investment, capital gains and foreign reporting information provided by your investment advisor
   
   
2. Have your children download their tuition receipts from their University portal
   
   
3. Ensure your have official donation slips for all your donations. If you only have a confirmation of your payment from the internet, that is not an official receipt and you will need to request an official receipt from the organization. If you want to earn a gold star, summarize the donations for your accountant so they have a total to compare against their total. This is definitely more than expected, but it acts as an excellent check and balance, as I have had many variances over the years and a summary provides a quick way to see if the client’s total was off or the accountants total was off.
     
4. If you made a donation of marketable securities (see this blog for more detail), make a note for your accountant. This is something they will likely pick-up, but it can be missed sometimes as the notation on the donation slip is sometimes small or in a corner somewhere and easy to miss.
   
   
5. For any medical expenses, where possible get one summary receipt, such as for a chiropractor or physio etc. Some pharmacies also provide a yearly summary, so you don’t have to provide 34 individual receipts.  
   
   
6. Still with medical receipts, if you are audited by the CRA, they will want to see a medical receipt that reflects payment. I often received the invoice for medical purchases, but not an invoice reflecting payment. You may need to follow-up with the medical practitioner to request a paid receipt (again, if you have several expenses with the same practitioner, get them to do one summary receipt reflecting the services and reflecting payment for those services)
   
   
7. If you have a line of credit with the bank for investment purposes (especially for professionals to fund their capital entitlement), see if your banker can provide a simple summary letter on the financial institution’s letterhead of the total interest expense for 2022
   
   
8.  If you have rental income, summarize your rental income and expenses for the year. Also provide any invoices for any large repair bills so your accountant can determine whether the expense is currently deductible or must be capitalized.
   
   
9. If you sold your home in 2022, provide your accountant the sale information. Also provide the date you purchased your home and the original cost information (although it may not be needed depending upon the circumstances). The above information must be reported to claim the principal residence exemption, or the exemption may be denied, or a substantial penalty levied.
   
   
10. Let your accountant know if anyone in your family has become a non-resident in the current year.
    
    
11. Review your return before it is filed. You know your affairs better than anyone. Do a quick overview of your return to ensure what you expect to be reported and deducted has been reflected accurately. In most cases everything will check-out, but sometimes things are missed or when reviewing your return, you realize you forgot to inform your accountant about some income or deduction for the year.

The above information will cover off much of your return. Many accountants make this easier by providing a checklist for you to organize your tax information. 

While all this organizing may seem like a lot of work when you are paying someone to prepare your return, you want those dollars spent having your accountant working on minimizing your taxes, not chasing down information.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

The Best of The Blunt Bean Counter - Dealing With the Canada Revenue Agency

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a May, 2011 post on dealing with the Canada Revenue Agency ("CRA") that is as relevant today as it was four years ago. I would not be surprised if many of you have not already received an information request as detailed below. I know I have already received 25 to 30 of these requests to date, in relation to my client's e-filed tax returns.

Dealing With the Canada Revenue Agency

I discuss below, the six typical circumstances by which an individual may end up dealing with the CRA during the year. 

The least worrisome of the six situations is where you initiate contact with the CRA to report a late income tax slip (such as a T3 or T5 slip), or you realize you missed a deduction or credit (such as a donation slip, medical expense or RRSP receipt). These situations are very straight forward and relatively painless. You or your accountant file a T1 adjustment request using form T1-ADJ E to report the additional income or claim the additional expense or credit. You would typically attach the receipt to the form and most of these requests are processed without further query from the CRA.

The second circumstance is where you receive an information request from the CRA. These requests often strike fear into my client's hearts, but are typically harmless. In this situation, the CRA usually sends a letter asking for back up relating to a deduction or credit claimed on the return. Generally these requests by the CRA are to provide support for items such as a donation tax credit, medical expense claim, a child care expense claim, a children's fitness tax credit claim or an interest expense claim. These requests are fairly common and more often than not, relate to personal income tax returns that are e-filed. You have 30 days to respond to these requests, however, time extensions are typically granted if you call the CRA and request such.

The third situation, and a step up on the anxiety meter, is the receipt of a Notice of Reassessment (“NOR”) from the CRA. A NOR may be issued for numerous reasons such as; not responding to an information request, the receipt by CRA of a T3/T4/T5 slip that was not reported in your return, or a reassessment based on an audit or review of your return as discussed below.

The fourth circumstance is typically not pleasant. Under this scenario, the CRA has selected you for an audit, either randomly or because you have come to their attention for some reason. An audit can take the form of a desk audit which is less intrusive or a full-blown field audit. Desk audits are typically undertaken to review a specific item that the CRA finds unusual in nature and you have 30 days to respond.

A full-blown audit could encompass a review of self-employment expenses, significant expense or deduction claims, or a full review of your personal or corporate income tax filings for a specific year or multiple years. In this situation, you will be sent a letter requesting certain information and you will be required to provide such to a CRA auditor. This process could take months, and if the CRA auditor is not satisfied by your documentation, or reasons for claiming certain expenses or deductions, they will issue a revised NOR.

Upon the receipt of the reassessment, you will have to determine, likely in conjunction with your accountant, whether the CRA’s assessment is justified. If you don’t feel it is justified, you need to consider if the amount of reassessed tax is significant enough to warrant the time and energy to fight the reassessment. If you decide to "fight" the reassessment, you and/or your accountant would file a Form T400A Notice of Objection. In this fifth situation, the Notice of Objection would state the facts of your situation and the reasons that you object to the CRA’s reassessment. The objection will then be reviewed (probably months later) by a CRA representative and you can make and support your case as to why the CRA has incorrectly assessed or reassessed you.

It is very important to make sure that you file a Notice of Objection on a timely basis. For an individual (other than a trust) the time limit for filing an objection is whichever of the following two dates is later: one year after the date of the returns filing deadline; or 90 days after the day the CRA mailed the reassessment. For corporations, the time limit is 90 days.

Finally, the sixth and final situation, and last resort, is to go to tax court because your Notice of Objection was not successful. There is an informal tax court procedure if your income tax owing is less than $12,000. Where the income tax owing exceeds $12,000, the process becomes formal and is costly and time consuming.

The above summarizes the various circumstances and situations under which you may deal with the CRA in any given year. Hopefully if you have any contact with the CRA it is only in connection to situation #1 or #2.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

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.

Confessions of a Tax Accountant -2012- Week 5 - The Top Ten Accountant Pet Peeves about Personal Income Tax Season

In honour of David Letterman, today I present the top ten pet peeves accountants have during personal income tax season. Of course these peeves relate to experiences I had prior to arriving at my current firm and from what other accountants have told me, since my clients sign a blood pact to do none of these things.

Top Ten

10. Clients who in the past year have had a change of address, got married or had children and expect their accountant to reflect such on their tax returns by telepathy. 

9. Clients that provide a shoe box with every receipt they received during the year from tax forms such as T4's & T5's to receipts for his and hers waxing's (I outlawed shoe boxes ages ago). 

8. Clients who sell inherited shares and think we should know the adjusted cost base of the Bell Canada shares they inherited from their great grandfather in 1973, that have split six times since. 

7. Clients who do not track their auto or employment expense and say “just use last year's”. The problem being they have said just use last years seven years in a row and you have no clue if the expenses claimed on their tax return, have any resemblance to their actual expenses.

6. Clients and friends who call you up to tell you about their golf score and what a beautiful day it was, while you work on your 30th tax return of the day on your 30th consecutive day of overtime.

5. Clients who bring their income tax information in on the Monday of the third week of April and call on Wednesday to see if it’s done yet.

4. Clients who bring in all their tax forms in the original envelopes, unopened; and insist on opening each envelope one by one in front of you (with my limited patience threshold, suffice to say I have none of these types clients).

3. Clients that buy a Turnip farm limited partnership for $100,000 without consulting you, but then argue over $100 on their tax return invoice.

2. Clients who insist on emailing or faxing each individual tax slip as they arrive.

1(a). Clients that call you up complaining that their refund was not large enough.

1(b). Clients that insist on meeting with you and reviewing each item to be used in their personal tax return, as if you have never prepared a tax return before, or wouldn’t know what to do with their professional dues or interest expense.

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.

Do you need a Professional Accountant to prepare your Personal Income Tax Return?

A while back, Robb Engen, who is a rising star in the financial blogging and writing world (the Echo half of Boomer and Echo and writer for the Toronto Star’s Moneyville) asked me when should someone engage an accountant?

Some of the considerations I forwarded to Robb are discussed in a recent Moneyville blog he wrote titled Why I'm using a tax accountant this year.

Today, I would like to expand on this topic and discuss when you should engage an accountant to prepare your personal income tax return. I would suggest that you always should engage an accountant if you have a corporation.

In general, unless you have self-employment income, commission income, rental income, or significant investment income, an accountant will be somewhat limited in the planning they can do for you.

I say this because, if you do not have these sources of income, an accountants experience, discretion and know-how are pretty much muted and you may as well purchase an income tax software program and file your income tax return yourself. That is not to say you may not want to engage an accountant on a one-off basis where required, it just means you are most likely paying for services you do not require if your personal return is simple.

Just so I don’t have a hundred accountants in an uproar, saying that I am steering away business from the profession (although some accountants are not keen to take on personal tax only clients anyways), I also suggested to Robb that you can look at an accountant as insurance. Like life insurance, or disability insurance, you don’t like paying it, but when you need it, you are glad you have it; although, at least we provide a yearly tax return with our yearly charge. 

I told Robb that there may be years when an accountant may not provide much in the way of income tax planning, but there will be a year somewhere along the line, when your accountant may provide advice that covers their fees for the next ten years and part of the reason for the tax savings may be your accountant’s familiarity with your personal situation.

I further suggested to Robb that another reason many people like having a relationship with an accountant, is because when they have a question or have a significant issue such as a new job offer, inheritance or they have lost their job, they can call someone they know who will accept their call and who understands their personal situation. 

The aforementioned situations are typically very stressful, and are often subject to severe time constraints in which a significant financial decision must be made. Without having an established accountant relationship, you may not be able to find someone who can assist you on a timely basis and/or is willing to drop current client work to assist someone with whom they have no prior relationship. That may sound harsh, but it is the reality for many established professionals, be they accountants or lawyers.

Finally, where you have a relationship with an accountant, they may provide unsolicited value-added advice in respect of such financial matters as wills, estate planning or how to deal financially with your children. For example, I recently had a corporate client come in to drop off their personal income tax information. They made some comment about one of their children that led me to ask if they had updated their will recently (which they had not). I then asked if they had upgraded their life insurance to account for the income tax they would incur if they passed away because of the increase in the value of an investment they had (they had not). I then asked them how that investment would be split with an arms-length partner if either of them died (we had discussed the issue before but they still had not officially addressed this in a legal agreement). All these issues are important and will hopefully be addressed in the near future by my client.

Now, ignoring the fact you are probably thinking I have a fixation with death, these are the kind of “add-ons” many accountants provide in the course of working with a client.  

In my opinion, if you have the types of income I note at the outset, I would suggest engaging an accountant is worth the cost. However, if you do not have these types of income, you have to weigh whether the less tangible benefits I note above are worth the cost of the accountants tax preparation fee.

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.

Income Tax problems and Voluntary Disclosure - Should you hire a lawyer or an accountant?

I am often amused, if not slightly irritated, by the radio advertising wars between lawyers and accountants over taxpayers with income tax evasion or non-reporting issues. The lawyers argue that they can provide you with solicitor-client privilege and the accountants say they have previously worked with the Canada Revenue Agency (“CRA”) and/or deal with the CRA on a consistent basis and thus know their way around the system.

The lawyers who specialize in this market niche appear to have clearly won the marketing wars, as they seemingly have convinced people that legal protection and briefing for future court battles is the only way to protect yourself from prosecution. I even had a former client with a very simple issue of non-reported income who was convinced by a lawyer that he would be making a huge mistake in using me and that a lawyer was the only way to go for his voluntary disclosure (I was just about to abbreviate voluntary disclosure, but thought better of it :). Even though I had no desire to undertake the voluntary disclosure work, on principle, I told the client if he used the lawyer I would be his ex-accountant as there was absolutely no need for a lawyer in his situation. This client however had drunk the legal kool-aid and was so convinced that I was not a practical alternative that he decided to move forward with the lawyer anyways. I must give credit where credit is due; certain lawyers have marketed this issue so well that the general public believes they are the only viable alternative.

On a practical basis, I have been involved with multiple voluntary disclosures over the years. The conversation with the CRA always starts on a no-name basis and the CRA has always been true to their word once my clients have provided full disclosure. In general, I have found the voluntary disclosure agents very fair.

So how do the lawyers create this fear of the CRA and the urgent need for their assistance? Three words: solicitor-client privilege. Lawyers who deal with people with income tax problems market this privilege as a hugely important tool in dealing with the CRA on voluntary disclosure matters. However, a voluntary disclosure is essentially just a financial disclosure exercise and privilege is a total red herring in almost all cases in my opinion. Where your client is a former contract killer who found god and wishes to catch-up on his taxes, then solicitor-client privilege would be a good thing.

If you have evaded income tax or mistakenly not reported income and have no criminal activity attached to such, I would suggest that if you have an accountant who has been through the voluntary disclosure process he or she is more than capable of helping you. Where you have a criminal issue attached to your disclosure, or information you want privileged, I would definitely recommend using a lawyer.

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.

Avoid a 20% Penalty-Ensure you report every income tax slip, no matter the amount

This year, several of my clients received their T3 and T5013 income tax slips well into April. A troubling offshoot of the late receipt of these income tax slips is that many people either file their income tax returns assuming they have all their income tax slips, or run out of patience and file with the slips they have on hand. The two filing scenarios noted above are not problematic; as long as you file a T1 adjustment form upon the receipt of these late income tax slips to report the missing income. 

However, in some cases, people do not receive their missing slips because they have moved during the year or the slips are lost in the mail or mixed in with the junk mail that is thrown out. Since people either forget about these missing slips or are oblivious to the fact they are missing [It should be noted that the Canada Revenue Agency ("CRA") uses a matching program to ensure you have reported all your income tax slips] an insidious penalty provision registers strike one in an abbreviated two strike at bat.

You see, under Subsection 163(1) of the Income Tax Act,  where a taxpayer has failed to report income twice within a four-year period, she/he will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. It is important to note that the amount of income that was unreported the first time is not relevant in the calculation. If you failed to report $100 the first time and $10,000 the second time, the penalty will be $2,000, a somewhat ludicrous result considering if the slips were missed in the reverse order the penalty would only be $20.

One would think that the taxpayer relief provisions (“fairness provisions”) would address the potential absurd outcome that results, but this is not always the case as Ian Spence learned. Mr. Spence omitted a small amount of income in 2004 (I am not sure why, but it could have been the tax slip was lost in the mail or any number of reasons). This omission was strike one. Strike two was more costly. Mr. Spence had H&R Block prepare his 2007 return and for whatever reason $36,219 in employment income and the related income taxes were not included in his return. The CRA reassessed his return for the $36,219 in income not reported. It also reassessed Mr. Spence for another $124 in tax, the net amount of income tax owing after including the $36,219 and giving Mr. Spence credit for the $9,000 or so of income tax withheld on the missing slip. As this was strike two, the CRA also assessed a penalty of $7,243, a seemingly unfair result.

Two things must be noted at this point. (1) If Mr. Spence had omitted the $36,219 of income in 2004 and then omitted the small amount in 2007, the penalty would have been minimal. (2) The actual amount of income tax owing due to the second omission was only $124, while the penalty was $7,243.

Mr. Spence applied for relief under the fairness provisions. He was not granted any relief. He then applied to the court seeking a secondary review by the CRA and the court granted such. However, the CRA once again turned down Mr. Spence’s request under the fairness provisions. Finally, Mr. Spence went back again to the Federal court seeking another review. This time the Federal court dismissed the application.

The moral of this story is: ensure you file a T1 adjustment for any slip you receive late and if you are missing a slip, follow up with the issuer, as the CRA will most likely not be sympathetic to your case.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Dealing with the Canada Revenue Agency

I discuss below, the six typical circumstances by which an individual may end up dealing with the Canada Revenue Agency (“CRA”) during the year. 

The least worrisome of the six situations is where you initiate contact with the CRA to report a late income tax slip (such as a T3 or T5 slip), or you realize you missed a deduction or credit (such as a donation slip, medical expense or RRSP receipt). These situations are very straight forward and relatively painless. You or your accountant file a T1 adjustment request using form T1-ADJ E to report the additional income or claim the additional expense or credit. You would typically attach the receipt to the form and most of these requests are processed without further query from the CRA.

The second circumstance is where you receive an information request from the CRA. These requests often strike fear into my client's hearts, but are typically harmless. In this situation, the CRA usually sends a letter asking for back up relating to a deduction or credit claimed on the return. Generally these requests by the CRA are to provide support for items such as a donation tax credit, medical expense claim, a child care expense claim, a children's fitness tax credit claim or an interest expense claim. These requests are fairly common and more often than not, relate to personal income tax returns that are efiled. You have 30 days to respond to these requests, however, time extensions are typically granted if you call the CRA and request such.

The third situation, and a step up on the anxiety meter, is the receipt of a Notice of Reassessment (“NOR”) from the CRA. A NOR may be issued for numerous reasons such as; not responding to an information request, the receipt by CRA of a T3/T4/T5 slip that was not reported in your return, or a reassessment based on an audit or review of your return as discussed below.

The fourth circumstance is typically not pleasant. Under this scenario, the CRA has selected you for an audit, either randomly or because you have come to their attention for some reason. An audit can take the form of a desk audit which is less intrusive or a full-blown field audit. Desk audits are typically undertaken to review a specific item that the CRA finds unusual in nature and you have 30 days to respond.

A full-blown audit could encompass a review of self-employment expenses, significant expense or deduction claims, or a full review of your personal or corporate income tax filings for a specific year or multiple years. In this situation, you will be sent a letter requesting certain information and you will be required to provide such to a CRA auditor. This process could take months, and if the CRA auditor is not satisfied by your documentation, or reasons for claiming certain expenses or deductions, they will issue a revised NOR.

Upon the receipt of the reassessment, you will have to determine, likely in conjunction with your accountant, whether the CRA’s assessment is justified. If you don’t feel it is justified, you need to consider if the amount of reassessed tax is significant enough to warrant the time and energy to fight the reassessment. If you decide to "fight" the reassessment, you and/or your accountant would file a Form T400A Notice of Objection. In this fifth situation, the Notice of Objection would state the facts of your situation and the reasons that you object to the CRA’s reassessment. The objection will then be reviewed (probably months later) by a CRA representative and you can make and support your case as to why the CRA has incorrectly assessed or reassessed you.

It is very important to make sure that you file a Notice of Objection on a timely basis. For an individual (other than a trust) the time limit for filing an objection is whichever of the following two dates is later: one year after the date of the returns filing deadline; or 90 days after the day the CRA mailed the reassessment. For corporations, the time limit is 90 days.

Finally, the sixth and final situation, and last resort, is to go to tax court because your Notice of Objection was not successful. There is an informal tax court procedure if your income tax owing is less than $12,000. Where the income tax owing exceeds $12,000, the process becomes formal and is costly and time consuming.

The above summarizes the various circumstances and situations under which you may deal with the CRA in any given year. Hopefully if you have any contact with the CRA it is only in connection to situation #1 or #2.

Next week I will discuss two other ways you may deal with CRA, but these are the relief provisions and not assessment or audit related.

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.

Confessions of a Tax Accountant & The Donation of Services to a Charity

I have pre-written many of my March and April blogs, as my life as a tax chartered accounant will get crazy shortly. Between preparing trust and estate returns which are due March 31st, personal income tax returns due April 30th, and the onslaught of December corporate year-ends, I will be kept very busy. In addition, I always seem to have a client either selling or purchasing a business during tax season, god forbid this should happen in the other ten months of the year.

To add content to my blog and to keep it fresh, I intend to start a weekly blog posting called Confessions of a Tax Accountant. This is not intended to be a whining session by an overworked tax accountant, but hopefully an update on income tax and filing issues that arise as tax season moves forward.

I am not sure where this will go exactly and whether it will work or be interesting, but I will give it a shot. An  issue that arose this week is discussed below.

Donation of Services

I had a client telephone me this week (actually the third client this year) excited that they were going to be issued a large donation receipt for the services that they provided gratis to a charity. Being an accountant, I did my duty and poked a hole in their balloon of inflated donation hopes.

Unfortunately, a charity cannot issue a receipt for services and they should not be leading my clients into thinking they can. The CRA says in regard to the gift of services  “at law, a gift is a voluntary transfer of property without consideration. Contributions of services (for example, time, skills, and effort) are not property. Therefore, they do not qualify as gifts for the purpose of issuing official donation receipts."

My clients cannot fathom the CRA’s position. They tell me their clients/customers would have paid significant sums for these services that they have provided for free. In a way I understand their frustrations, however, the valuation of services is such a nefarious concept that if you look at this objectively, it would create a valuation nightmare for the CRA to allow such; that is why the CRA requires valuable property such as cash or goods (although the donation of goods has its own valuation issues) before a donation receipt can be issued. As an aside, even if the CRA provided for issuing recipts for services, they would then consider the provider of those services to have earned notional income for those services resulting in a net of zero.

Where a charity pays a service provider and the service provider then chooses to donate the money back, the charity can issue a receipt for the monetary donation. However this also results in a net of zero to the service provider, ie: income reported equal to a donation credit.

[Blogers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, however, I may embellish or slightly change the 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.

Personal Income Tax Filing Delays-Late and Amended T-slips

As an accountant on the personal income tax firing line, I have seen an enormous shift in the timing of when personal income tax returns are filed in Canada. In the "good old days", the timing of the filing of income tax returns was determined by personality type. People who were early birds and wanted to file their returns to get their refunds as soon as possible or to fulfil their compliance requirement came in early. Many others provided their returns between the second week of March and the first two weeks of April and finally, individuals with the personality type that are Christmas shopping on the 24th, brought their returns to us in mid to late April. In the past, this was great for accountants as these groups split the returns down the middle or were 60/40 such that the workload was spread out over March and April. Clients got better service since accountants and their staffs were not overwhelmed and there was time to properly review the returns and provide planning advice.

However, over the last ten to fifteen years, as Canadians have become more sophisticated and started purchasing mutual funds, flow-through investments and certain other investments, the filing landscape has changed drastically. Since T3 forms for mutual funds and the T5013 forms for limited partnerships do not generally have to be issued until the end of March, many clients, even the early birds, cannot file their returns early. This problem is exacerbated as the penalty for missing the filing deadlines are relatively minor and not a deterrent to the filing corporations, trusts or partnerships. Also there are no penalties for filing amended T3s, T5013s etc. The CRA appears to condone the multiple amending of returns and forms by these trusts and partnerships which are often amended in the last week or two of April.

Whether you engage an accountant or not, this issue still affects you. You may have all your slips ready to file March 1st, but you must wait for that one final slip possibly until the end of March or even later, delaying your refund. If you are waiting for one slip or even two and the quantum is not large, you may consider filing early and then filing a T1 Adjustment when you receive the slips, but most people do not want the hassle of doing such.

In addition, many T3 trust returns, for family trusts often have a March 31st filing due date (the return is due within 90 days of the taxation year often December 31st). Since the deadline for most T3 and T5013 forms is also March 31st and many of these slips have not yet been received, the filing of these returns can be problematic. Thus, accountants are forced to file returns using the information on hand at March 31st and then amend the returns when the tax slips are eventually received.

With clients often waiting for several tax slips, the filing ratio in my practice has changed such that now approximately 1/3 of returns are filed in March and 2/3 are filed in April. From an accountant’s perspective, the last two weeks of April are insane and not conducive to preparing tax returns. In addition, we end up filing many T1 Adjustment forms for the late or amended slips and the CRA wastes resources administering all these amendments. It is interesting to note that the CRA is aware of this issue and actually addressed it in the 2007 Federal Budget saying; it would review and streamline the T3 slip process, but nothing seems to have changed.

In my opinion, the CRA should consider one of the following changes:

1. A February 15^th deadline for T5s and a March 15^th deadline for T3s and T5013s etc.
2. February 28^th deadline for trusts and partnerships that don’t have significant investment income (say 5% or less). Any investment income would be accrued where it was less then 5% of the total revenue.
3. A March 15th deadline for T3s & T5013s where the units are held by investors (ie: income trusts, flow through partnerships, mutual funds etc.) and a March 31st deadline for family trusts.
4. Or probably, most practically, significant penalties to deter the late filing of forms or penalties where amended forms and returns are done on a consistent basis.

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.

Charitable Giving

There have been several articles in the last couple of months about the decline in donations to Canadian charities. Statistics Canada reported Canadians donated one billion less dollars in the two-year period from 2007 to 2009. The reasons for the decrease in giving range from the poor economy to the number of donation scams and finally, the large allocation of donated funds to charity administration.

Rob Carrick recently had an article in the Globe and Mail expressing concern about Canada’s ‘generosity deficit” and ways to rejuvenate charitable giving. He provided information on how you can easily incorporate giving into your life and the tax benefits of making charitable donations. I had an email exchange with Rob stating that in my opinion, the problem is not a rejuvenation issue as much as a change in society’s attitude toward giving. I want to expand on this issue in this blog. 

First, let me state that I think a substantial issue is the economy and when, and if, people feel good about their job prospects and the economy, a significant amount of donations will come back. But, as someone who has been involved with the Make A Wish Foundation and the Reena Foundation, I know multiple charities are just chasing the same big donors. Where will the growth come from outside of these big donor corporations or wealthy individuals?

At this point I am going to state some personal opinions that may be way off or misguided. I will get to some income tax considerations later on; but hey, this is my blog and today I am veering off a little.

Some of the articles I have read note that the average age of donors is now 53 instead of 51. I think this statistic is significant and it can’t be explained away by saying that younger people are not faring as well in the economy. As a tax accountant, I have done thousands of tax returns for many very wealthy Canadians. You would be surprised at how many returns have just a $50 donation to the Cancer Society or Sick Kids, etc. There are many entrepreneurs not following the charitable gospel espoused by Warren Buffet and Bill Gates I think the donation issue is a cultural issue or family issue. I can almost trace giving down a family tree as I prepare income tax returns for selected families. When a child is brought up in a charitable household they almost always follow through as a contributor to charity.

In my opinion, charities are going to have more trouble going forward as the older generation passes on and charitable values diminish; as the younger generation seems to increasingly shun religious institutions. As the concept of charity springs from religion, charities will continue to suffer unless parents can ingrain giving as part of a child’s upbringing religious or otherwise.

So what is the financial benefit of a charitable donation? Once you exceed the $200 minimum donation limit, each dollar saves you 46.4% in income tax in Ontario through the donation tax credit. So really, you are only out of pocket $54 for each donation.

If you wish to donate public securities you do not have to pay the capital gains tax on the security donated. Thus, you not only get the 46.4% donation credit, you save 23% in income tax on the capital gain.

There are additional charitable tax planning ideas that can reduce the after-tax cost of donations using flow-through shares and insurance, however, they are beyond the scope of this article.

Terra Restaurant

Excellent restaurants are few and far between in North Toronto, but a screaming exception to that rule is Terra.

I have been to Terra a couple times recently, once with my wife for dinner, and once for a business meeting. Both meals were excellent, especially my dinner visit.

For our dinner visit we had the tasting menu. I usually agree to ordering a tasting menu because my wife enjoys them. Personally, I am usually starving when I finish, as the portions typically get lost under the garnish. However, at Terra I was full at the end.

The dinner started with a tasty Amuse Bouche.

The second course was a duo of two of my favourite items, a lobster potsticker and Seared Ahi tuna in a mango salsa. Both were excellent.

The third course was a very substantial helping of potato gnocchi with mushrooms, scallion and parmesan in a roasted garlic cream sauce. It was outstanding, but very filling. The portion was too large, not a usual complaint for a tasting menu.

The fourth course was a sorbet, to cleanse the pallet as they say.

The fifth course was a choice of salmon or a beef filet. The beef filet was 10oz – massive for a tasting menu. Both my wife and I had the filet and it was excellent.

The sixth course was a sampling of cheeses and finally the seventh course was a combo of a miniature crème brulee and chocolate torte.

It was an excellent all around dinner.

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.

Sign That Will

I always try to ensure that my clients have up to date wills (if they have their own corporations I recommend 2 wills to reduce probate tax) that tie into their estate plans. Often one of the action points following a meeting includes updating a will. However, I have observed a consistent procrastination in relation to completing this task. In the end, I think it is an issue of mortality. People just don’t want to face their mortality and preparing or updating a will brings you face to face with the fact you are planning post mortem. I have seen situations of wills drafted months and years ago that remain in draft because of a reluctance to deal with the issue only to have that person or their spouse pass away with the draft will still unsigned. The proposed changes become null and void and the estate is forced to go back to a prior will that was usually created years and years ago when the taxpayer had limited wealth to distribute.

Thus, if your will needs to be updated, it is extremely important that you not only update the will, but also ensure the process is completed on a timely basis.

As noted above, I try to ensure that my clients’ wills are updated to tie into their estate plans. This can be problematic on its own. Some clients live in a penurious manner, denying themselves their just rewards so that their children will inherit the maximum amount possible, while others believe they deserve to live life to the utmost and if there is nothing left for the children so be it. Still others want their children to earn their own money and leave their inheritance to charity. Finally, there is the most common mid-ground, where a client wants to leave substantial funds to their children while still enjoying the fruits of their labour.

Whatever the decision, there are various means to achieve the wealth transfer from outright gifts to the use of trusts. The details of such means will be a topic in a future blog.

Bucket List

In the 2007 movie The Bucket List, starring Jack Nicholson and Morgan Freeman, two terminally ill men head off on a road trip with a wish list of the things they want to do before they die. As result of the movie, the term “Bucket List” has become a common slang term.

In the movie, the characters were ill when they created their bucket list. The message of the movie is to live life to the fullest while you are able and not to wait until you are old or sick. The movie did not garner many good reviews, but the message certainly made many think about setting some time aside to create their own bucket list and stop putting off their dreams for "someday" in the future.

I created my own bucket list the day after watching the movie. My bucket list includes travel (African Safari, Bora Bora, Australia) and certain golf spots (Pebble Beach, St. Andrews) amongst other things.

Daily life often gets in the way and when you finally look up, time has flown by.
I suggest if you have not created your own Bucket List, you consider doing so and create a plan to start acting upon it.

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.

Ontario HST Small Business Transition Support and Sales Tax Transition Benefit

Pretty boring stuff, however I have been asked a couple times by sole practitioners about the taxability of both the Ontario HST Small Business Transition Support and the Ontario Sales Tax Transition Benefit, so here it is.

The Ontario HST Small Business Transition Support payment going out to small businesses across Ontario is meant to provide assistance to small businesses with the transition to HST. This payment is for Ontario businesses with revenue of less then two million dollars for the most recent 12 month period ending after January 1, 2009 and is being sent out automatically. The maximum credit is .05% of revenue to a maximum amount of $1,000.

The Ontario HST Small Business Transition Support payment is taxable.

The Ontario Sales Tax Transition Benefit is meant to provide temporary relief to residents of Ontario to help them adjust to the HST. Ontario residents that qualify will receive three payments. The first payment was in June 2010. The next two payments are December 2010 and June 2011. The maximum benefit is $300 for single people and $1,000 for families. Single people lose their benefit if their income exceeds $82,000 and families lose their benefit if their income exceeds $166,700. The payments are sent out automatically when you file your 2009 and 2010 tax returns.

The Ontario Sales Tax Transition Benefit is not taxable.

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.

Smoke & Mirrors - Is Retirement as Costly as We are Led to Believe?

I recently attended a course taught by David Trahair called “Smoke and Mirrors”. David is a well known author and proponent of various retirement and investment strategies that contradict accepted conventional wisdom. Some of David’s against-the-grain thoughts are (1) GIC’s are a better investment than stocks (2) RRSP’s are not the Holy Grail and (3) you need substantially less to retire than the investment community purports. Although I may disagree with some of the above, I nevertheless find several points David makes about retirement to be poignant and I discuss them below.

David attempts to dispel the financial planning “myth” that you need to accumulate enough funds at retirement to provide for 70% of your current yearly income, i.e.: if you make $100,000 a year you will need $70,000 a year in retirement and a retirement fund of at least $1,400,000. David feels the mythical 70% number is in most cases significantly in excess of what will be required at retirement.

David is a proponent of eliminating all debt pre-retirement. This ensures that at retirement you are not paying out funds and depleting capital, but rather living off the capital. He feels that the reduction of debt has a secondary positive offshoot in that during your working life, your need for disability insurance is reduced. The rationale is that since repaying monthly debt is the largest cost for most people, as that debt is reduced, your need for disability insurance that would cover these debt payments is also reduced.

David feels that in addition to the significant reduction of mortgage and other debt payments in retirement, retirees will have additional cost reductions as dependent children become self sufficient, RRSP or pension plan contributions cease, and tax burdens and automobile costs decrease. David feels that it is important to plan to purchase your last car before retirement and drive it a number of years in retirement.

As David would admit, one size does not fit all. I would suggest your costs in retirement will be far less than 70% if you don’t plan to travel, help your children buy a house, join a golf course, etc. That is why it is vital to have a financial planner who takes all your future needs into consideration and reviews your pre-retirement spending habits.

This is where I agree totally with David: you need to have a financial plan and take charge of your future now. Review your monthly spending and determine what can truly be trimmed now and what could be trimmed in retirement.

China- Communist or Capitalist?

I was recently in Beijing and Singapore and will blog about both these countries in more detail in future blogs. I am having trouble reconciling China and its economic growth. As someone who had never visited China, I did not know what to expect in Beijing. What I found was a bustling city with hundreds and hundreds of office buildings, Cartier stores, Hugo Boss stores, etc. I met several US businessmen in my hotel who told me China is a great place to do business, yet the typical Chinese citizen does not appear to have benefited in equal amounts from this “capitalistic” growth and wealth either in lifestyle or wages. It is all very confusing for someone who does not have intimate knowledge on China, its politics or its change in attitude towards commerce.

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.