Year-end Tax Tip Tweets - For the Week Ending November 22nd

My Twitter year-end tax tips for this week are listed below. This is my last set of tweets on this topic. As I tweet tax and money related information fairly regularly, you may want to follow me on Twitter @bluntbeancounter.

Tips for Week of November 18 - November 22, 2013

Did your kids attend private school in 2013? Ask if any of the fees can be claimed as child care expenses and/or a donation #yearendtips

If you turned 71 this year, you must convert your RRSP to a #RRIF or annuity by the end of the year #yearendtips

Consider donating shares of public companies as opposed to cash; you will pay no #capitalgains tax. #yearendtips

Look at whether purchasing a #flowthrough share is effective for your tax and investment purposes. #yearendtips

Purchasing a tax shelter investment? The refund may be held by the CRA (although they lost a case) until the tax shelter is audited #yearendtips

Children cut out, charities cut in

In today's Globe and Mail, Marjo Johne writes an interesting article on how donating some of the families fortune can create a philanthropic legacy - but also bitterness among heirs if not done right. Katy Basi, an estate lawyer and frequent contributor to this blog and I are quoted. Here is a link to the 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.

Confessions of a Tax Accountant -2013- Week 3

I am not sure if you are still receiving late T3 & T5013 slips, but if my clients are any indication, I am sure many of you are. We finish a tax return and then are provided another slip and have to re-run the return. What a waste of time for us and aggravation for the client. This week my confessions touch on four totally unrelated topics.

• The first topic is whether or not travel expenses to "check on" a rental property, especially in resort locations, are deductible.
• Unfortunately we have had to file a couple of terminal income tax returns this year for deceased clients or the deceased parents of clients. In preparing these returns, we must discuss with the legal representatives whether it makes sense to opt out of the automatic tax-free transfer to the surviving spouse. I discuss this issue in detail below. 
• For my third and fourth topics, I briefly touch on which spouse can claim charitable donations and the earned income limitation that restricts certain child care claims.

 

Travel Expenses for Rental Properties

This year I have had a couple of clients ask if they can deduct travel expenses related to their rental properties. The CRA's position is "you might travel to collect rents, supervise repairs, and manage your properties. To claim the expenses you incur, you need to meet the same requirements discussed at line 9281. Travelling expenses include the cost of getting to your rental property. Travelling expenses do not include board and lodging, which we consider to be personal expenses."

Since it is income tax season and I am looking for time saving alternatives, I will direct you to an excellent article written by Andy Wong on Travel Expense Advice for Landlord's. Although slightly dated, it covers many of the issues associated with this topic.

Andy concludes his article by saying "As a rule of thumb, you should claim necessary travel costs such as when you have to be present to supervise contractors or to authorize repairs, particularly after you booted out a difficult tenant. As for claiming travel costs to check on your property annually, that's questionable at best, unless you have a valid reason for having to be there."

I could not have said it any better than Andy. All I would like to add is that there are really two types of travel expenses, those for rental properties in your own city or a couple hours away, such as a cottage and those to visit more remote locations, typically in resort cities such as Florida, Arizona, Las Vegas, Whistler or Banff. Where travelling by car, you should log your mileage or specifically track your gas expenses. For the more remote locations, the CRA will always consider your costs to be personal unless you have hard evidence to the contrary, notwithstanding the case Andy notes in his article.

Terminal Tax Returns - Electing Out of the Tax-Free Rollover to a Spouse

Most people are aware of the general rule that when you pass away, if your assets are left to your spouse or a spousal trust, the property will transfer tax-free at its initial cost base to your spouse, or the spousal trust. The benefit of this rollover is that is defers any income tax upon the death of the first spouse until the passing of the second spouse.

In most cases, the surviving spouse and/or legal representative will want this automatic rollover to apply. However, where a deceased spouse has minimal income on their terminal tax return or has shares of a Qualified Small Business Corporation that qualifies for the $750,000 (soon to be $800,000) capital gains exemption, it may actually make sense to elect out of this automatic rollover.

To do this, the deceased taxpayer's legal representative makes an election in the deceased's terminal tax return under subsection 70(6.2) of the Income Tax Act to opt out of the automatic tax-free rollover to the spouse. By making the election, the proceeds of disposition of the property to the deceased and the cost to the spouse or spousal trust are deemed equal to the fair market value of the property immediately before death.

For example, say Tim died in 2012 and he owned 500 shares of Bell Canada that were worth $40 on the date of his death and had a cost base of only $10. Tim left the shares to his spouse Anne in his will. If Tim's legal representative does nothing, the shares transfer to Anne tax-free with a cost base of $10, deferring the capital gain until Anne passes away. But say Tim had only $10,000 of taxable income because of various deductions he was allowed on death for donations etc. Tim's legal representative could elect to include the shares of Bell Canada in his terminal return. This would result in an additional capital gain on Tim's final return of $15,000 ($40-10 x 500 shares). However, because he has various unused credits the Bell shares would result in minimal to no income tax on Tim's terminal tax return. Anne would then inherit the shares with a $40 cost base instead of the $10 cost base.

The election can be made on a property by property basis. The CRA has stated that "a subsection 70(6.2) election may be made with respect to a partial shareholding of a corporation. For example, where a shareholder owns 1,000 shares of ACo, the election under subsection 70(6.2) may be made in respect of some of the shares, and subsection 70(6) will apply to the remainder of the shares."

Donations - Mine or Yours?

Many clients provide their donation receipts to us in two piles, one for each spouse. I think the reason they do this is that they are unsure whether the donations must be reported individually or as a family.

The answer is that the CRA administratively allows donations to be claimed by either spouse, regardless of whose name is on the receipt is issued.

Since the first $200 of donations only provides a federal credit of 15% and the excess is creditable at 29%, it almost always makes sense to combine family donations, such that you are only subjected to one $200 limitation.

Earned Income for Child Care Expense Claims

In general, child care expenses can only be claimed by the spouse with the lower net income. The child care expense claim is then limited by the lessor of the allowable expense claim and 2/3 of the lower income spouses earned income. This earned income restriction came as a shock to a client who was claiming child care for the first time this year but it has surprised others over the years as well. For all intents and purposes, unless the lower income spouse has employment income or self-employment income, they will have no earned income and not be able to claim child care. Where a family will incur child care costs and one spouse will have little or no earned income (which can happen due to various reasons, most typically where both spouses are owners of a company and are compensated by dividends), consideration should be given to the following:

1. Having that spouse work part-time to earn enough income to cover all or most of the 2/3 limitation.
2. If you have your own business or are self-employed, consider employing your spouse to  undertake administrative or other duties they are qualified to undertake and pay them a reasonable wage.
3. Some employers allow you to hire an assistant. If your employer allows such and will sign a T2200 form, consider hiring your spouse. Again the wage must be reasonable and they must actually work.

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.

Information Requests from the CRA that make you go Hmm

Every year after income tax season, I can count on several clients calling to inform me they have received an information request from the Canada Revenue Agency (“CRA”). One of the most common requests is a request for back-up information in regard to child care expense claims made for nanny's employed by my clients.

The CRA states the following in the information request: “to support your claim, please provide the following information: Either receipts, cancelled cheques or your Business Number (if you have issued a T4 slip to a caregiver)”.

Each time a client who has employed a nanny receives such a request, I shake my head. That is because where my client has hired and paid a nanny for childcare services, they are required by law to issue the nanny a T4 and when my clients file their income tax returns and make their childcare claims, they must provide the nanny’s name and SIN# on the childcare Form T778.

One would think that rather than wasting taxpayer’s time and CRA resources, the CRA would simply just punch the nanny's name and SIN# into their computers to cross-check that the nanny has reported the income provided on their T4 on their income tax return. This would seemingly confirm (a) the taxpayer actually paid the childcare costs and (b) the nanny has reported the income.

I have asked CRA agents numerous times why the CRA undertakes the above process and does not simply cross-check the child care claim instead of wasting my client’s time and the CRA’s resources. All I get is I agree with you, I don’t know why.

Maybe there is a more nefarious reason for the information request; however, no one has yet been able to provide such a reason or maybe they are not willing to do so.

Another information request my clients constantly receive is a request to provide the tuition receipt form T2202a for Canadian students and the T11A form for foreign students, typically, students attending University in the United States.

Where a client has e-filed, I understand the request for support of the tuition claim.

However, for those few clients who still prefer to paper file and the numerous Canadians that still paper file, this request is another head scratcher (especially since it has been a common request for years, even before e-filing became the norm). Why these information requests make you go hmm is that the CRA specifically states that you should only complete schedule 11 and not attach the T2202a form to your income tax return. You would think that if the CRA is going to consistently ask for the form, they would just make it a requirement to attach the form to save both taxpayer’s and the CRA’s time and resources.

 I could go on, but I will let any reader who wishes to pipe in to add to this list of things the CRA does that makes you go hmm.

Financial Blogger Michael James recently set forth his views on CRA Processing Reviews in this blog post.

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 1

The Children’s Arts and Fitness Amounts

The federal government in its infinite wisdom has now added a Children’s Arts Amount credit to the Children’s Fitness Amount credit. From an accountant’s perspective, these credits are a nuisance. Already early this tax season, there has been much confusion with my clients because of the overlap of these credits and how these credits integrate with making a child care claim. Thus, I thought today, I would try and clarify the confusion surrounding these credits.

The maximum eligible expenses for each of the Fitness Amount and the Children’s Art Amount are $500. The first misconception most people have is that they think they save $500 dollars for each of these amounts or that each amount is worth a $500 deduction.

However, both the Fitness and Arts Amounts are actually tax credits worth at maximum, $75 each per child federally. The federal credit is calculated as $500 x 15% refundable credit=$75. There may also be a provincial credit for these amounts. For example, in Ontario, there is a Children’s activity credit worth $50.90 ($509x10%), that is a hybrid of the fitness and arts credit-i.e. both fitness and arts program are eligible for the credit.

Thus, the maximum tax savings per child who undertakes both eligible activities for fitness and the arts in Ontario is $209 ($75 fitness amount, $75 arts amount and $50.90 activity credit).

Children’s Arts Amount

The CRA discusses the details of the Children’s Arts Amount at this link.

You can claim a maximum of $500 in eligible expenses per child for fees paid in 2011 relating to the cost of registration or membership of your child in a prescribed program of artistic, cultural, recreational, or developmental activity. The cost covers registration for each child under the age of 16 at the beginning of the year. To qualify for this amount, a program must:

Be ongoing (either a minimum of eight consecutive weeks long or, in the case of children's camps, five consecutive days long) and be supervised and be suitable for children.

The program also has to meet one of the following criteria:

1) It contributes to the development of creative skills or expertise in an artistic or cultural activity;
2) It provides a substantial focus on wilderness and the natural environment;
3) It helps children develop and use particular intellectual skills;
4) It includes structured interaction among children where supervisors teach or help children develop interpersonal skills; or
5) It provides enrichment or tutoring in academic subjects.

The art's amount is entered on line 370 of Schedule 1, to a maximum of $500 per child.

There will be situations where an amount paid will qualify for both the Fitness and Art’s amounts. However, the CRA states in the notes on eligibility that amounts that can be claimed as the federal children’s fitness amount cannot be used for the Arts credit and thus, any excess amount over $500 already claimed for the Fitness Credit cannot be claimed for the Art’s amount. This was confirmed by calls our firm made to the CRA.

If you have paid an amount that would qualify to be claimed as a child care expense and that amount also qualifies for the children's arts amount, you must first claim this amount as a child care expense (as per the notes to this link). Any amount in excess of the child care claim may be claimed as a children's arts amount as long as the requirements are met, but the same amount may not be claimed once as child care and once as an art's credit.

Children’s Fitness Credit

As this credit has been around for a few years, I will not go into much detail about this program. Essentially the Children’s Fitness Amount, is a non-refundable credit and allows parents to claim a maximum of $500 paid towards an eligible program. The cost covers registration for each child under the age of 16 at the beginning of the year. It does not cover the costs of things such as equipment or travel expenses.

Details of the program are available here.

As per the CRA in its notes to the Fitness Tax Amount, if you have paid an amount that would qualify to be claimed as child care expenses, and the children's fitness amount, you must first claim this amount as child care expenses. Any unused part can be claimed for the children's fitness amount as long as the requirements are met.

So in summation, where an art's or fitness amount qualifies as child care, it must first be claimed as child care and any excess amount may then be claimed as an art's or fitness credit if the expense qualifies for either of the credits. Where an amount meets the criteria for both the art's and fitness credits, you can only make one claim, either the art's credit or the fitness credit, but you cannot claim both.

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.