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.

Confessions of a Tax Accountant -2014- Week 2

This week I finally got rolling and I reviewed several income tax returns. A few issues arose from these reviews which I discuss today.

The first issue is an often overlooked medical expense. The second issue, a matter I have discussed before, is how financial

institutions fail to adjust their realized capital gain/loss reports for flow-through shares and how this can result in significantly understated capital gains. The final issue is the confusion in reporting capital gains from the sale of your mutual fund.

Employee Paid Health Premiums

 

Way down at the bottom of your T4, in box 85, you may find a number. That number is the amount of premiums you paid for your private health service plan. This payment qualifies as a medical expense on line 330 of your return and is very easy to miss. According to this blog, Canadian MoneySaver is the person responsible for box 85.

Your Flow-Through Capital Gain is only Understated by $100,000

In my recent post on The Dynamics of the Investment Advisor/Accountant Relationship, I note that one way for Investment Advisors ("IAs") to lose the accountant as an advocate is to not assist in sorting out their clients flow-through tax shelter information. As I have discussed in the past, the issue is more than an advisory issue, it is a financial institution reporting issue.

Very quickly, if you purchased a flow-through share for $10,000, the Adjusted Cost Base ("ACB") is ground down to zero almost immediately by the initial resource exploration and development expenses you claim. By the end of year 1, your ACB is often nil (the ACB may increase in future years because of income allocations, however, let's assume it stays at zero). In year three or so when the flow-through is converted into a mutual fund, the cost base is nil, even though you originally paid $10,000. Say you sell the mutual fund immediately after converting your flow-through for $4,500. For tax purposes, you have a capital gain of $4,500 since you have a nil cost base. Yet, most financial institutions report the disposition as a capital loss of $5,500 (the $10,000 initial cost less $4,500 proceeds).

I have been told that from a liability perspective, the financial institutions do not want to get into making tax cost base determinations (although, I have seen some of the better IAs and certain investment counsel firms adjust the ACB to the proper amount). I can understand this position; but, I cannot understand why the financial institutions or the IAs do not at least highlight this issue in some way when they print out the realized gain/loss schedule for their clients.

To date, I have had three capital gains reports provided by IAs that were materially wrong because they had the incorrect ACB for flow-through shares. For two of the clients, their actual capital gain was understated by significantly more than $100,000. In summation, these transactions need to be highlighted in some way on capital gain/loss reports.

Mutual Fund Sales - Oops, I thought the gain was on the T3

Do you own mutual funds? If so, you may have to report two capital gains this year. The first capital gain(s) you will have to report will be the capital gain(s) reported on your T3 slip(s) for any mutual funds you still hold at the end of 2013. In addition, if you sold any of your mutual funds in 2013, a second gain, being the capital gain on the disposition of the mutual fund sold must be reported.

I am discussing this issue for two reasons. The first, a client called last week to advise me that after reviewing the capital gains reported on their annual mutual fund statement for 2013, they realized they had missed this information in 2012; so the topic is on the top of my mind. The second reason is preventive. If you have mutual funds, you probably just received your T3 slip in the last couple days, so you may have not yet filed your return. Thus, you have time to review your annual mutual fund statement to check whether you need to report the sale of any funds in 2013.

So let me explain the issue in greater detail. Assume that in 2012 you purchased 1000 units of the BBC Spec Stock Mutual Fund for $7,000 and also purchased 2000 units of the BBC Bond Fund for $8,000. Let’s also assume in the same year you re-invest your distributions to purchase additional units of the BBC funds. So last year you would have received a T3 slip (usually one T3 slip with a supplementary page breaking down the total on a fund by fund basis) from the BBC Mutual Fund reporting interest, dividends and capital gains earned in the year. This income is essentially the distributions you re-invested in the BBC fund.

Many people assume any capital gains they realized on the sale of their mutual fund units are also reflected on these T3’s, however, the T3 slip just reports gains (and other income) the fund itself has earned and distributed in the year, not your proceeds of selling the actual fund.

For example, if in 2012 the BBC Spec Stock Fund owns shares of Rocky Raccoon Mines and during the year the fund sold these shares for a $400,000 gain, your T3 slip for 2012 would have reported your proportionate share of the Rocky Raccoon gain, say $400 if you owned .001% of the fund. This $400 distribution is re-invested in additional Spec Stock BBC units and your adjusted cost base is now $7,400 as of January 1, 2013.

If you sold the Spec fund in 2013 for $8,000, the $600 ($8,000-$7,400) gain will not be reported on a 2013 T3 slip, even though you will receive one for the BBC bond fund you still own. This gain must be reported by you on Schedule 3 of your tax return.

It is very easy to miss the actual sale of your mutual fund units, since this information is often embedded in your annual mutual fund summary. If you own mutual funds and sell a fund during the year, ensure you make a note to yourself to look for the capital gain information on the annual yearly summary and report that gain on your tax return.

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 2

This week I actually had some income tax returns to review and a few issues arose from those returns. Today I will discuss three of those issues. The first issue is a major pet peeve of mine. That being, how financial institutions misreport or don't adjust their realized capital gain/loss reports for the adjusted cost base reduction on flow-through shares. Another issue that caused some confusion this week was how taxpayers age 60-70 are supposed to deal with CPP contributions. Thirdly, I note a medical expense claim for people who suffer from Celiac disease and are unable to eat gluten. 

Flow-Through Limited Partnership Misreporting

I have discussed the merits of investing in flow-through shares (typically investments in limited partnership units, not shares) on a couple of occasions, including this guest post I wrote for the Retire Happy Blog, titled "How to Save tax with a Flow-Through Shares. As I noted in the guest post, the adjusted cost base ("ACB") of a flow-through share is generally "ground-down" to nil after claiming the initial resource exploration and development expenses. For the purposes of this post, I will ignore that some limited partnerships may allocate capital gains and investment income to the investors such that their ACB will often increase from the ground down nil value. As noted in my introduction, many institutions provide capital gains reports that do not reflect the ground-down ACB and thus, understate their client's capital gains.

This issue is best explained by using an example. Let's assume I purchased 1000 units of the BBC Flow-Through Limited Partnership in 2011 for a cost of $10,000. In 2011 and 2012 I received $10,000 in exploration and development deductions which I wrote-off on my tax return. Assuming the BBC Flow-Through did not allocate me any capital gains or investment income or business income/losses, the ACB of these units at January 1, 2013 is nil. Say the BBC fund is rolled into a mutual fund in 2013 and I then immediately sell the fund for $9,500. My capital gain in 2013 should be $9,500, since I have a nil ACB.

However, I have already received two capital gain summaries for clients where the ACB reflected by the investment institution is relected as the $10,000 initial investment amount, not the ground-down value of zero. Continuing with my example, the summaries have reflected a $500 capital loss, not the actual $9,500 gain. Since my client's may purchase $25,000 to $50,000 of flow-through shares at a time, this error has the potential to be significant.

Our firm is always on the look-out for incorrectly reported capital gains/losses on flow-through shares, as we have seen this issue numerous times over the years. You would think the investment brokers would have internal controls such that the proper amount is reported and accountants don't have to find these errors (which can be easily missed when you have 15 pages of capital gain reporting to scan through). However, what we typically get is a general disclaimer that the institution is not responsible for the accuracy of the capital gain/loss statement, despite the fact they compiled the report.

CPP Contributions for People 60 - 70 Years Old

Over the last couple years, there have been various changes made to the Canada Pension Plan ("CPP") legislation. These changes and the resulting confusion manifested itself last week. I discuss the two issues that arose below.

Self-Employed People

If you are between the age of 65 and 70, receive CPP benefits and earn self-employment income, you have to elect not to contribute to the CPP on your 2012 income tax return. This election is made on Schedule 8. The election remains valid until you revoke the election or turn 70. If you do not make the election, you will be subject to CPP contributions on self-employment income.

Employee

This week I had a client's bookkeeper ask why the CRA had reassessed my client's company for the employer's share of CPP and the client's share of CPP not reported on their 2012 T4, when the client was already receiving CPP retirement benefits.

I informed the bookkeeper that starting in 2012, CPP contributions became mandatory for employees age 60 to 70 who work while receiving a CPP retirement pension. These contributions go toward the new Post-Retirement Benefit (PRB), which is effective January 1 of the year following the employee’s PRB contribution. This additional benefit is added to the employee’s current retirement benefit, gradually increasing his or her retirement income.

However, if you are between 65 and 70 and receiving CPP benefits, you can elect out of CPP by completing form CPT30.

I have been informed that the CRA as an administrative concession for 2012 maybe allowing late-filed CPT30's for those aged 65-70 caught by the new 2012 rules. Supposedly, this administrative concession will be applicable only for the transition year 2012. For 2013 and subsequent years, the election must be filed. I will update you when I can confirm this administrative policy or can provide more details.

Medical Expense Claims for Gluten-free Products

For people who suffer from Celiac disease, the Income Tax Act provides a medical expense claim for the incremental costs of purchasing gluten free foods. For example, if a loaf of bread costs $3 and gluten free bread costs $7, you can claim the $4 the difference as a medical expense. Over the year, the additional cost can add up to a significant number. For more details, see this CRA link.

As medical expenses are only creditable to the extent they exceed 3% of your net income, many people who suffer from Celiac disease seem to think the effort to track the incremental costs are in many cases not worth the effort. That is an unfortunate result; however, if you already exceed the 3% threshold, there is no reason not to undertake this tracking exercise.

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.