Confessions of a Tax Accountant -2014- Week 4

This year I am going to end my confessions series a week early. I am doing this for two reasons. Firstly, to be honest, I have not found much to write about that I have not already discussed in prior income tax seasons (other than the T1135 fiasco). Secondly, I am a little burnt out from tax season (getting a mild case of food poisoning and having your back act up never helps). So I will see you again in a couple weeks, hopefully in a better state of mind, but until then, I have a couple tips for filing your tax returns this year and some tax planning tips you should consider implementing sooner rather than later.

A Couple Final Reminders

1. File your income tax return on time (May 5th this year) to avoid the 5% late filing penalty (in addition to the 5%  penalty, there is an additional penalty of 1% a month thereafter for each month you are late - that could total 17% in total).

2. If you have to file the T1135 Foreign Reporting Form, file it as soon as it is completed. With the July 31st deadline extension, you may either complete the form and not rush to file, or put it off. However, 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.

Tax Planning for 2014

 

While taxes are on your mind, you may want to consider some tax planning you can undertake now or plan to undertake in 2014.

Prescribed Rate Loans

 

If you are lucky enough to have significant non-registered assets and your spouse is in a low marginal tax rate or does not earn any income, you may wish to consider a prescribed interest loan to your spouse before June 30, 2014. Essentially, you can make a loan at 1% until June 30, 2014 (at which time the prescribed rate may or may not change) and that rate of interest remains for the life of the loan. Thus, as long as your spouse can earn greater than 1% a year on those funds, you have benefited from income splitting. As discussed below, there are interest payment requirements that must be met. Here are three prior posts I have written on this topic:

1. 1% Prescribed Interest Rate Loan - A Great Income Splitting Opportunity - A good overview.

2. Paying for Private School With Tax-Free Money -  A discussion about using a prescribed loan to fund your child's education. You need to read this one in conjunction with the third post.

3. Prescribed Rate Loans Using a Family Trust - Again, you need some large coin to do this, probably at minimum a few hundred thousand in non-registered accounts, but very effective if you have the money.

Transferring Capital Losses Amongst Spouses

 

If you or your spouse have any unused capital losses after preparing your 2013 tax returns, and  the other spouse has unrealized capital gains, you may want to consider transferring the capital losses to the spouse who has the unrealized gains. If you are in this situation, you should start the planning for this now. As this type of planning is complicated, you should speak to your accountant (or engage an accountant for a short consultation) to ensure you do this properly.

I discussed this type of planning in this capital gains post, go to the 3rd paragraph from the bottom (Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains).

Get Your Record Keeping In Order 

If you were scrambling this March and April to put together either your employment expenses, rental income or self-employment income, then make your life easier and either start using Quicken or create an excel spreadsheet to track these costs. If you update your expenses every month, not only will you reduce your stress next tax season, but you will have more accurate records and most likely capture more expenses.

In addition, get in the habit of downloading any donation receipts immediately. This will ensure you do not miss any donation credits next year and save you scrambling to recall which donations you made.

Make the Acronym Contributions Early

 

Don't wait to next December to make your RESP or TFSA contributions or February, 2015 in the case of RRSPs. Where possible, make these contributions throughout the year. It will ease your cash flow and these accounts will have additional time to grow tax-free.

That's it for now, I've got a bunch of tax returns to get out.

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.