Income Tax Preparation Tips

As promised last week, here is a summary of the Tax Tweet Tips I posted last year (in many cases, expanded from the 140 character limit imposed by Twitter). I have updated these tips to assist you in preparing your 2013 personal income tax return

Tax Tips for Preparing your 2013 Return

1. If you sold stocks or real estate in 2013, ensure you have the original cost documents. 

Note: This issue is twofold. Firstly, you should always maintain stock purchase confirmations or the annual summary to substantiate the adjusted cost base of any stock purchases. You also must maintain the original reporting letter and statement of adjustments for any real estate purchase. Secondly, many people do not keep receipts (or they may have paid cash) to substantiate cost base additions to their rental properties or cottages. Without these documents, you may have a difficult time convincing the CRA that the adjusted cost base of your real estate is higher than the original purchase price.

2. Confirm your 2013 installment payments online. Alternatively, there is a summary of the 2013 installments you paid on the back of the 2014 installment reminder the CRA just sent you.

3. Interest expense related to your investment accounts is often missed. Check the bottom left of your T5 summary for the interest you paid during the year.

4. If you sold collectibles in 2013, such as coins, stamps and china, they may not be taxable if your proceeds were <$1,000.

5. Canadian residents who are also US citizens or Green Card holders must file a 1040 US return. If you are a Canadian resident earning Rental Income in the US, you must file a 1040NR.

6. Do you own shares in any delisted, bankrupt or insolvent companies? You may be eligible to file an election to claim the capital loss this year.

7. When filing a deceased parent/grandparent’s return, ensure you report any deemed dispositions of stocks or real estate.

Note: Upon passing, if property is not transferred to a surviving spouse, the deceased taxpayer is deemed to have disposed of their capital property at death as if they actually sold the shares or real estate. The determination of the cost base of that property can often be problematic to say the least.

8. File returns in the year your child turns 18.They may be eligible for some claims at 18 and others at 19 are based on their age 18 return.

9. If you sold capital property in 2013 that was held prior to 1994, review whether you elected to bump the value in 1994.

Note: In 1994 the $100,000 capital gains exemption was eliminated. However, you were entitled to make a final election to use your capital gains exemption on stocks, real estate etc. Many people forget they made such an election and that their cost base on certain property is higher, which reduces the capital gain to be reported. This election was used extensively by people on their cottages. So if your parents sold their cottage in 2013 remind them to check if they made the election in 1994.

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

11. If you have a Line of Credit for investment purposes, check your December, 2013 statement for a summary of the interest you paid in 2013 & claim the interest expense that related to your investments (you may have to apportion that expense if you co-mingle your LOC with personal expenses).

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

13. If you sold a US stock in 2013, use the F/X rate from the year of purchase to determine the cost and use the 2013 rate for the proceeds. You have two choices. Either use the actual F/X rate on the day of purchase and sale, or you can use the CRA's yearly average rate however, you must be consistent.

14. Did you sell a REIT in 2013? Reduce the ACB by the return of capital from prior years.

15. Last tip. Don’t file your return late no matter what! There’s a 5% penalty + another 1% per month up to 12 months. Even if you cannot afford to pay the tax due, file your return to avoid the penalties. You can usually make arrangements with the CRA to pay off your tax liability over time if you provide reasonable terms of repayment.

Hiring The Blunt Bean Counter

This is the time of the year when I’m frequently asked by readers of The Blunt Bean Counter to provide individual tax preparation services. While it is truly is an honor to receive these types of inquiries, my tax practice at Cunningham is focused on corporate tax, estate planning and financial advisory.

Unfortunately, these days, Chartered Professional Accountants only have about 3-4 weeks to complete the majority of our personal income tax returns, because most of our clients T-slips do not arrive until early April. This circumstance has forced me to narrow the scope of my tax compliance practice and I typically reserve the time I do have available to prepare personal tax returns for the owner-managers of the companies that I service. Consequently; I am unable to take on any additional personal income tax return work for non-corporate clients.

I am actively taking on new corporate clients and welcome direct company inquiries and referrals. My contact information is noted on the right-sidebar, just above the little trophy.

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.

Year-end Tax Tip Tweets - For the Week Ending November 15th

My Twitter year-end tax tips for this week are listed below. I really like this week's tips as many are not the standard tips you read, if I do say so myself. You can also see them as they come out daily on Twitter each morning and afternoon. My twitter name is @bluntbeancountr. I hope there will be one or two tips that are beneficial.

Tips for Week of November 11 - November 15, 2013

If you make installments, review your income tax situation to see if the Dec 15th tax installment is necessary #yearendtips

If you plan to withdraw $ from your #TFSA, do it before Dec 31 so the withdrawal will be + back to your limit on Jan 1/14 #yearendtips

If you own a corporation, review your shareholder loan account to determine what you may need to dividend in 2013 #yearendtips

If you cashed in a #RRSP in 2013, the tax is often under withheld. Prepare a draft return to see if you have a tax liability #yearendtips

If you have not made a #RESP contribution in 2013, consider making one before Dec 31st#yearendtips

Don’t wait until February 28th to contribute to your RRSP. Contribute now if you have the money #yearendtips

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

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

My Twitter tax tips for this week are listed below. My twitter handle is @bluntbeancountr.

Tips for Week of February 4 - February 8, 2013

If you sold stocks or real estate in 2012, ensure you have the original cost documents. If not, pray you are not audited #blunttaxtip

Note: This issue is twofold. Firstly, you should always maintain stock purchase confirmations or the annual summary to substantiate the adjusted cost base of any stock purchases. You also must maintain the original reporting letter and statement of adjustments for any real estate purchase. Secondly, many people do not keep receipts (or they may have paid cash) to substantiate cost base additions to their rental properties or cottages. Without these documents, you may have a difficult time convincing the CRA that the adjusted cost base of the real estate is higher than the original purchase price.

The CRA now requires mandatory E-Filing by accountants. Filing a paper return is no longer a strategy for complex returns. #blunttaxtip

Note: While most accountants have embraced E-Filing by now, many accountants still preferred to file their more complex client returns by paper, to avoid the typical E-File document support requests; this is no longer an option.

Confirm your 2012 installment payments online, or look on the back of the 2013 remittance forms the CRA sent u for a summary.#blunttaxtip

Do not transfer stocks with capital losses to your RRSP last minute for an RRSP contribution; the capital loss will be denied. #blunttaxtip   

Note: Believe it or not, I have seen this issue arise not only where a client did this unknowingly, but also where an investment adviser suggested the transfer. Do not transfer stocks with capital losses to your RRSP. As per this blog on RRSP swaps, I had thought these type transfers had been essentially eliminated. However, I was told as recently as last week by an adviser that his firm still undertakes such transfers.

Interest expense related to investment accounts is often missed. Check the bottom left of T5 summary for interest paid during the yr. #blunttaxtip

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Punitive Income Tax Provisions

The Income Tax Act ("Act") contains numerous punitive provisions that can catch taxpayers off-guard. Today I will review some of those provisions.

Late Filed Income Tax Returns

Many taxpayers who cannot afford to pay their income liability on April 30th or June 15th (if you are self-employed) do not file their income tax returns on time. That is the worst possible decision. The Canada Revenue Agency ("CRA") imposes a late-filing penalty of 5% of the balance owing for late filed returns and then tacks on an extra 1% a month for each full month your return is late to a maximum of 12 months. For those mathematically challenged, that is a potential  17% penalty for simply not mailing in your income tax return by the deadline. If you file on time, you will owe interest, a small cost to avoid the penalty.

If you have incurred a late-filing penalty in either of the three preceding taxation years, your late filing penalties are doubled and apply for up to 20 months for a maximum penalty of 50%. Yes, fifty percent, that is not a typo. You may be able to apply for Taxpayer Relief ("Fairness") on your penalty; however any reduction in the penalty relies upon the discretion of the fairness committee. My advice, always file on time even if you cannot afford to pay your tax liability.

Interest on Taxes Owing and Refunds

As noted above, you can easily avoid a late-filing penalty by just filing on time. Unfortunately, you cannot avoid interest on  taxes owing. Interest compounds daily at the prescribed rate on any balance of tax owing after April 30th, currently at 5% as per this CRA schedule of interest rates.

Some may find this hard to believe, but as per the above schedule of prescribed rates, the CRA only pays taxpayers filing personal income tax returns 3% on overpayments and refunds, yet charges 5% on deficient payments. Go figure.

Instalments

Per this CRA instalment guide the CRA will charge interest at the prescribed rate of 5% if you did not make instalment payments or made payments that were less than the required amounts.

You may also have to pay a penalty if your instalment payments are late or less than the required amount. The penalty only applies if your instalment interest charges are greater than $1,000. The penalty is calculated as follows:

The higher of:

■ $1,000; or
■ one-quarter of the instalment interest that you would have had to pay if you
had not made instalment payments for 2012.

The CRA then subtracts the higher amount from your actual instalment interest charges for 2012 and finally, they divide the difference by two and the result is your penalty. Since no one can follow that calculation, the CRA provides the following example:

Example

For 2012, John made instalment payments that were less than he should have
paid. As a result, he has $2,500 of actual instalment interest charges for 2012. If
John had not made any instalment payments in 2012, his instalment interest
charges would have been $3,200. Since one-quarter of $3,200 is $800, we
subtract $1,000 (the higher amount) from $2,500. The difference is $1,500. Then,
we divide $1,500 by two. John’s penalty would be $750.

There you go, clear as mud. Just pay your instalments on time, since your accountant has no clue if the instalment penalty is calculated correct or not :)

Penalty for Unreported Income (missed tax slips)

Under Subsection 163(1) of the Act, where a taxpayer has failed to report income twice within a four-year period, she/he will be subject to a 20% penalty of the amount you failed to report the second time. 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. In addition, the reality of the situation is that it is very easy for a T3/T4/T5 slip to be misplaced or lost in the mail.

I find this penalty insidious and have previously written on this issue in a couple different blogs.

T1135 penalty

Where you hold certain types of foreign property with a cost over $100,000, you must file the required T1135 Foreign Reporting Form. Where the form is not filed as required, the CRA can levy a penalty equal to $25 a day to a maximum of $2,500. The quantum of this penalty is just unconscionable where the income has been reported, but the form not filed. I can understand this penalty where the income has not been reported, however, where the income is reported, how can a penalty of such magnitude be charged?

Wow, that's all I can say when I read back my post and digest the various punitive provisions. While these provisions are necessary to ensure compliance with the Act, the quantum of many of these penalties is just obscene.

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 Kid in the Candy Store: Human Nature, RRSPs, Free Cash and the Holy Grail

Several weeks ago I read a column by Rob Carrick titled “Why TFSAs Trump RRSPs for the young and lower paid.”. The column was premised on a paper by Jamie Golombek of CIBC on why TFSAs beat RRSPs as a better retirement savings for some Canadians. This topic has subsequently been beaten to death, but in this blog I want to concentrate on the exchange I had with Jamie in regard to human nature and its impact on investing.

The Globe and Mail had an online discussion about the above article and I sent in the following comment: “The problem with technically correct solutions is that they ignore human nature. As a Chartered Accountant I can tell you people consider their RRSPs holy and try their best to never withdraw from them. A TFSA or any accessible account is like candy, you stare and stare and then indulge.”

Jamie responded "you may be surprised to learn that that 80% of all RRSP withdrawals are made by individuals under age 60, generally pre-retirement! Not much of a holy grail!" Jamie's paper also reports that recent data shows 1.9 million Canadians withdrew $9.3 billion from their RRSPs in 2008 and taken in conjunction with the 80% withdrawal statistic noted above, suggests RRSP funds are being used well before retirement age to supplement income.

Jamie clearly considered the human nature aspect of investing in his report (see Accessibility of Funds on page 5) and provides statistics to develop or support the thesis of his paper. I have no issue with his statistics or his assertion RRSPs are being used to supplement retirement income by those under the age of 60. I do object however, to his contention that RRSPs are not considered the Holy Grail.

In my practice, I have observed that RRSPs are the Holy Grail for most of my clients. More importantly, RRSPs seem to act like those invisible fences for dogs and form an invisible barrier to prevent my clients from "grabbing" at their RRSPs; although I think Jamie would suggest the barrier may have some holes in it based on his statistics.

I asked Rob Carrick his thoughts on the matter and he responded, "I'm stunned every time I read stats on how many people take money out of their RRSPs, never mind TFSAs. The harder it is to withdraw from a retirement savings vehicle, the better."

On the surface, it is difficult to refute Jamie's assertion without my own statistics. Numbers are numbers. But, if we could dig a little deeper the same numbers may tell a different story. Here is where human nature and its impact on investing come into play. Human nature, like physical nature, takes the path of least resistance. At the end of the day, my professional observation of human nature takes me down the same road as Rob: the greater the barrier, the better - even if some ignore the barrier. Anyway, I will leave this for the psychologists to study and will return to my laboratory, being my office, and provide some personal experiences on human nature and free cash.

RRSPs, The Holy Grail Or Just Full of Holes

In my accounting practice, it has been my experience based on discussions with my clients, that they withdraw RRSPs almost exclusively for financial need only and not for discretionary purposes. I will concede that my client’s incomes are well above the national average and thus they may not be a representative sample. If we could somehow ask each person who withdraws funds from their RRSP in Canada, “why are you doing such and what is the intended use of the funds?", I am convinced that the vast majority would answer we are taking out the funds due to financial need and not for discretionary purchases. Most people take a certain pride and comfort in their RRSP savings. There is a peculiar permanency in investing in an RRSP that is not nearly as tangible in a TFSA or other savings account. Non-RRSP savings accounts seem to represent “leftover money”. RRSPs represent security from old age impoverishment. That is the Holy Grail. Most people cash out RRSP’s only under financial duress. Financial duress is not the same as supplementing income.

So what about those alarmingly counter-intuitive statistics that would suggest we have become an unholy nation desecrating their RRSPs? It is highly probable in my humble opinion, that many Canadians are convinced that they have to contribute to a RRSP by the various advertisements they are bombarded with in January and February each year by financial institutions and at the urging of financial commentators and in fact, many were really not in a position to contribute to their RRSP in the first place, thus dooming their RRSP from inception and inflating the withdrawal statistics.

I See It, I Want It

Now, assuming we are not compelled to withdraw our savings (or perhaps more aptly borrowings), restricted savings accounts are like invisible fences, or the glass in front of the candy counter. Withdrawing cash from an accessible savings account like a TFSA is relatively easy. Especially when we see that cash as “leftover earnings”, or as a well-deserved reward for how much we’ve earned or how hard we’ve worked. If we move away from restricted accounts such as RRSPs, the invisible fence seems to turn off. Now the buying is easy. Self-restraint is hard. Accessible cash quickly winds its way along the path of least resistance and a cash register.

I often observe the sweet lure of accessible cash in the actions of many self-employed individuals and professionals in respect of their quarterly personal income tax installments. Some make significant sums of money, but you would not believe how many don't have the funds to make their quarterly income tax installments. This results in huge income tax liabilities around April 30th and installment interest and penalties for failure to make these required installments. Why don’t they have this cash you ask? In some cases they have not collected their accounts receivable or received allocations from their partnerships, but in many cases, they have spent the free cash that should have been allocated to their income tax installments on discretionary items only because it is was easily accessible and winking at them.

A hot topic that has been widely debated recently is whether it is better for small business owners to eschew salary and RRSPs in favour of leaving the funds in their holding company. Technically leaving the money in the corporation is correct (although I have some reservations with this strategy because you stop RRSP contributions, lose eligibility for CPP income in the future if no salary is taken, and potentially forgo the deductibility of child care expenses if no salary is taken) but in my opinion, the candy (ie: available cash) will prove too tempting for most people and some of those corporate funds will find their way to cover that vacation they wanted in Europe or that new car or boat they have their eye on; whereas if those funds were contributed to a RRSP, the invisible fence effect would come into play. I have observed this first hand with the typical current holding company structure where excess profits from a operating company are moved to the holding company; this new twist would only create more accessible cash to potentially be withdrawn.

Intuitively Rationally Irrational

Although not directly related to free cash, an example of personal behavior superseding fundamental financial common sense is in relation to income tax refunds. Individuals can file a form T1213 to obtain waivers to reduce income tax withholdings in certain circumstances, but almost no one does. Ignoring the administrative issue of obtaining the income tax withholding reduction, which may contribute in part, individuals just love their lump-sum tax refunds (usually as result of their RRSP contributions) and they intuitively know they would not save an amount equal to the same lump-sum income tax refund if they had their income tax withholding reduced on a bi-weekly or semi-monthly basis.

I have only anecdotal evidence to prove people consider their RRSPs the Holy Grail. But really, is it unreasonable to accept that TFSAs or other non registered accounts are merely shelves displaying the cash candy to which our sweet tooth cash cravings will inevitably succumb? The path of least resistance generally ends at the cash register in the candy store. The high road is easier to follow when the candy case is locked. A financial vehicle that people feel is “locked in” will help stymie our natural inclination to self-indulge and spend and will only be accessed under financial duress and not necessarily as a supplement to retirement income. Now that is a Holy Grail indeed.

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.