CRA Information Requests – 2018 Update

In December 2016, I wrote a blog post titled CRA Information Requests - 2016 Update in which I discussed that corporate clients had been receiving information requests from the CRA to support their equipment (capital cost additions) and/or had received information requests to support professional fees that had been claimed.

On the personal side, I noted that taxpayers were receiving information requests to provide support for Interest deduction expense claims, foreign tax credit claims and matching income requests.

Today, I provide a quick update on what I am seeing.

Beware if You are Receiving or Paying Management Fees

Lately, I have seen the CRA issue information requests to support management fees paid. The requests appear to relate more specifically to intercompany management fees, but these requests can directly or indirectly lead to information about management fees paid to owner-managers.

As detailed in this guest post by Howard Kazdan last year on Management Fees, it is important to have proper support for the payment of these fees. This support is often lacking for both intercompany payments and payments to shareholders who consider themselves independent contractors.

It should be noted that management fees paid to owner-managers as independent contractors can be problematic in the first place, as detailed in this 2015 blog post.

The CRA information requests essentially ask for all the information Howard suggested you document or maintain in his blog post, including some of the following:

1. The name and Business or SIN# of the corporation or individual receiving the management or administration fees

2. If the fee was paid to a related party

3. Copy of the contract for services

4. Description of the services provided and log if available

5. Invoices for the services provided

I would suggest many corporations and shareholders have been lax in ensuring there is proper documentation and that the remuneration for the services is fair-market value. If you do not have your act in order, in respect of documenting the payment of management or administration services, I suggest you make this a high urgency task.

Individual Taxpayers

From an individual taxpayer perspective, we are still receiving information requests to provide support for interest deduction expense claims, foreign tax credit claims and income matching requests (technically a separate program). In addition, I have seen several requests to support alimony payments.

I have also seen information requests for individuals that are owner-managers of corporations and have claimed employment expense based on a T2200 form signed by their related company. If you want to read an excellent summary about deducting expenses as an employee, this tax bulletin by BDO Canada LLP titled “Deducting Expenses as an Employee”, is very exhaustive.

For those not aware, a T2200 form must be completed by employers for their employees to deduct employment expenses from their income. Many people receive these forms from their employers each tax season, so they can claim their auto expenses related to their job, however, other people use the form to claim a home office expense or various other employment expenses related to their job.

The CRA requests have been specifically for those individuals who are shareholders of the corporation issuing the T2200; we have not seen a general review of employment expenses for employees (although I do see these occasionally).

In reviewing corporate shareholders employment expenses (most notably auto and home office expenses) the CRA had been disallowing these expenses in many cases, based on a lower court case decision.

However, it is my understanding the CRA is considering reversing these re-assessments and will set forth new criteria for owner-managers in respect to claiming employment expenses going forward. If you have been re-assessed or are in the middle of objecting, speak to your accountant about this issue, there may be positive news forthcoming.

If you have claimed any of the expenses that are leading to the information requests I detail above, you may want to review your records to ensure you have your documentation readily available in case you receive an information request.

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.

CRA Information Requests - 2016 Update

Lately, many accountants feel like their main area of practice is responding to information requests sent to our clients by the Canada Revenue Agency (“CRA”). Below, I update you on what I have been seeing in these requests, for both small business owners and individual taxpayers.

What Small Business Owners Need To Know

In 2015, many clients received letters from the CRA requesting support for their equipment (capital cost additions) for income tax purposes. Essentially, the CRA wanted back-up for asset purchases on which capital cost allowance (depreciation) was claimed. These requests were fairly benign and just required some information gathering.

This year, many of my clients have received a CRA information request letter asking for documentary back-up of professional fees claimed on their financial statements.

It appears that for 2016, professional fees are the flavour of year. From the CRA’s perspective, they are looking for personal professional expenses put through small business owner’s corporations. Examples of these types of expenses would be: legal bills for divorces, personal estate planning, and corporate expenses for reorganizations, that should either be all or partially allocated as Eligible Capital Expenditures.

Taxpayers and their accountants are finding these requests extremely time consuming to comply with. The information requested includes a general ledger print out of the expenses, copies of each invoice and where the invoice does not say paid, (invoices issued by professional very rarely are receipted – for example, when your lawyer issues you an invoice for updating your minutes, when you pay, they do not issue a paid receipt) and copies of bank statements to support payment.

Say you have been requested to provide this information for 2014 and 2015; you could be looking for 25-50 invoices if you have a lot of professional subcontractors or are billed monthly by your bookkeeper. You then need to either get each professional to issue a summary receipts letter noting all the invoices issued and paid or provide bank statement back-up (which most clients tend to do).

Once the documentation is provided, the CRA reviews the information (some clients have been contacted to provide additional information or facts) and in some cases issues a reassessment. However, the actual reassessments do not provide any detail as to which expenses have been denied and for what reason(s). Where clients were contacted by the CRA, they assume those expenses were the cause of the reassessment. In other cases, we have to call the CRA to find out what expense(s) were denied. These reassessments are a bit atypical of the CRA who usually provide greater detail in respect of changes made.  

Individual Taxpayers

Non-corporate clients have been receiving several types of information requests. They include:

1. Interest deduction expense claims
2. Foreign tax credit claims
3. Matching income requests

Interest Expense Claims

Several clients have received an information letter request asking for details of their interest expense claims. The letters ask taxpayers for correspondence from the lending institution detailing the original amount of the loan, reasons for the loan, interest expense back-up and bank loan statements. Obtaining this information can be very frustrating, especially where you no longer deal with the lender/bank.

The reasoning behind these information requests is that the CRA is attempting to track the use of funds to a deductible use. i.e. if you took out an investment loan, they want to see the money went into your investment account to purchase marketable securities and was not used partially or wholly for your kitchen renovation.

Foreign Tax Credit Claims

These letters are looking for back-up for foreign taxes paid, where you have claimed a foreign tax credit for investment income or employment or business income earned in another country.

Where you have an investment account with a financial institution and receive a T3/T5 that has foreign income allocated to you and foreign tax withheld, this request is fairly innocuous, as you just essentially send in the T3s or T5s.

However, if you have earned employment income or business income in the United States or another country, you need to provide proof of payment of the taxes. This has become a huge issue for the US, since the IRS does not provide a notice of assessment similar to Canada that shows tax assessed and paid. Thus many people have had to make special requests to the IRS for this information and it is not easily obtained or provided, let alone requests for information from less sophisticated foreign countries. Lately, in the case of the U.S., the CRA is now allowing bank statements and cancelled cheques in lieu of the special request letter, where these documents can support the actual tax paid.

Matching Income Requests

I have written many times about the matching program. Each fall the CRA compares tax slips in its data base to those reported on Canadian’s tax returns. Often slips are missed since they were lost in the mail or misplaced by the taxpayer and the matching program catches the missing slip and related income.

This year, we have started seeing three page print-outs requesting proof that the income was reported. Clients, who have received such requests, have been very concerned that somehow they (or their accountant) missed reporting thousands of dollars of tax slips. However, in most cases, all these slips have been reported, there is just one or two on the three page list that have been reported as perhaps a 50/50 split with a spouse or had an incorrect SIN number.

However, it takes hours to respond to these requests, slip by slip (especially since the financial institutions often summarize income from various sources on T5's, yet report source by source to the CRA. We thus need to reconcile these amounts).

We all accept that the CRA must ensure income tax compliance; however, I wonder if these requests can be streamlined in certain cases? I know some accountants who refuse to Efile and continue to still paper file, solely to reduce the amount of requests they have to deal with.

This is my last post for 2016 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. May your 2017, be information request free :)

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.

Credit Cards - Tax, Budget and Repayment Issues

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

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

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

3. Finally, the ludicrous minimum balance repayment reminder.

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

Income Tax Simplification

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

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

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

Tracking Credit Card Spending

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

Minimum Payment Information

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

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

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

Debt - An Ugly Four Letter Word

Personal debt in Canada has reached its highest level in history. As reported by Statscan, the ratio of debt to personal disposable income (all your debt divided by your annual after tax income) hit a high of 154.34 per cent for the first quarter of 2012, up from 149.22 per cent for the first quarter of 2011. This extreme level of debt is a result of an extended period of historically low interest rates, a sluggish economy and, to some extent, an “I see it, I want it, even if I can’t afford it” attitude amongst many people.

No matter the reason, if you have debt, you need to step-back and determine if you can organize and consolidate your debt and/or make your debt income tax effective. The comments I offer below are mostly organizational in nature and are not intended to help those with serious debt issues. If you are overwhelmed by debt, I strongly suggest you consider engaging a professional debt counsellor who will not only try and help reduce your debt, but will try and address the personal habits that often create or accentuate debt problems.

Organize and Consolidate

A good first step to managing your debt obligations is to summarize your debt. Create an excel spreadsheet and list all the debt you have down the left hand side of the spreadsheet. This will include your mortgage, any lines of credit, all credit cards and any other debt you may have accumulated along the way.

Then, across the top of your excel schedule, have the following columns:

Name of creditor - company or individual to whom you owe your debt
Amount of debt outstanding
Credit limit related to the debt
Interest rate or where floating, terms of debt (i.e. Prime +)
Terms of repayment and date due
Pre-payments - Where term is fixed, what is the maximum pre-payments allowed
Penalties- Are there any penalties for paying off debt early
Deductibility - Is the debt deductible for income tax purposes (see discussion below)
Notes - This will be a catch all for any information not noted in the other columns and for notes on whether debt is connected to other debt or assets (e.g. is your interest rate lower because you have a mortgage, line of credit and investment account with an institution or is the debt or debt rate contingent on any other factor).

Finally, lower on the page, below the debt summary, create a new heading called assets. List all your assets including your house, non-registered accounts, registered accounts, rental properties, TFSA, etc. Create three columns across the top; value of asset, debt related to asset and tax deductibility (in general if the asset is an income producing non-registered asset, any associated debt will be deductible).

As basic as the above sounds, sometimes having everything written down and organized allows you to gain some perspective and take a 10,000 foot view.

Once you have completed the above task, review the interest rate column to determine which debt has the highest interest rates. In most cases, this will be your credit card debt. You should then review whether you have the capacity to use a line of credit or other debt instrument with a lower interest rate to pay off your credit cards and effectively lower your rate of borrowing.

If you have debt at various institutions, ask your main institution for a lower rate on the total debt if you consolidate the debt at that institution.

Tax Deductibility

Finally, you should review whether you have any assets denoted as tax deductible, for which you have no related debt. For most people, those assets would include shares of your own business, non-registered investment accounts that hold stocks, bonds, ETF’s etc. and rental properties. There may be other assets; however, these are the most typical. If you have any of these type assets and they are not encumbered by debt, you may be able to make some of your debt deductible for income tax purposes. Typically, this involves circulating monies; you liquidate interest deductible assets for which there is no related debt (taking care to ensure you are not creating any capital gains) pay off the non-deductible debt and then borrow to replace the original investment assets, making the interest expense deductible. Before undertaking such a transaction, professional advice should be sought.

There is no panacea for eliminating debt. However, at a minimum, you will want to undertake the various steps and review processes noted above, to start consolidating and reducing your debt as well as ensuring your debt is income tax effective to the greatest extent.

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.