Confessions of a Tax Season Accountant - Late T-slips and Reporting the Sale of Your Principal Residence

In today's tax season confession, I will provide an update on the required reporting when you sell your principal residence. I also include my annual rant, about the fact many of my clients must wait until late March or early April to receive their final T-slips.

Condensed Tax Season

Just to be consistent with the prior 7 years, I will again complain about the condensed nature of tax season. I receive about 65% of my clients returns after March 31st, causing a crazy April. The delay is typically caused by clients waiting for their T3 and T5013 tax slips (you would not believe the amount of emails and faxes I received last week with just arrived T3's and T5013's). I ponder why, with current technology, that all filing deadlines for T4’s, T5’s, T3’s and T5013’s cannot be moved up by 15-30 days, so everyone has adequate time to file their tax returns. I guess this is one of life’s little mysteries.

Principal Residence Exemption Rules

As discussed in this October 2016 blog post on the new Principal Residence (“PR”) reporting requirements, you must now report the sale of your PR (typically your house but can also be your cottage) on your tax return.

For 2016, you just had to report the sale on schedule 3, unless the gain was not fully exempt, in which case you had to file Form T2091 (IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). However, for 2017 and any future years, you must now file schedule 3 and Form T2091 in all cases.

If you designate your home/cottage as your PR for all the years you owned it on schedule 3 (box 1), other than the free plus 1 year, (you may recall the formula to determine the exempt portion on the sale of your PR is the capital gain on the sale of your PR, times the ratio of the number of years you have lived in your home [i.e. designated the home as your principal residence] plus 1, divided by the number of years you have owned the property) the form is fairly simple to complete. You just need to fill out the first page of the T2091 form. You will need to include the following information:

• the year of acquisition of the property you sold
• the proceeds of disposition 
• the address of the property being designated as a principal residence 
• the years you owned the property and are designating as your principal residence.

Penalty

There are stiff penalties for not filing the PR designation on time. New paragraph 220(3.21)(a.1) will allow for late-filed forms subject to certain time restrictions. The penalty will be the lesser of the following amounts:

• $8,000; and

• $100 for each complete month from the original due date of the relevant income tax return to the date that your request for a late-filed designation is made in a form satisfactory to the CRA.

The CRA says on their website that a penalty may apply where the PR election is late-filed. I would work on the assumption the penalty is applicable and you will need the CRA to be merciful to have the penalty removed.

It is also important to note that if you do not file the T2091 form, your return can be re-assessed at any time. This means the usual statue barred period of 3 years is not applicable and your return remains open until the end of time or three years from when your return is assessed, when you finally file the form.

If you sold your principal residence in 2017, simply put, complete schedule 3 and file Form T2091, or there may be punitive repercussions.

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 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.

Confessions of a Tax Accountant -2012- Week 3 - My T3's Near Death Experience

I typically base my confession posts on client comments or client related income tax issues that arise during tax season (subject to my usual caveat that I embellish or slightly change the facts to protect the innocent); however, this week's confession is based upon my own personal experience.

Last week when my wife and I separated the junk mail from the "real" mail we had received that day, we made our usual junk mail pile on the counter for me to recycle. The next morning my wife was about to hand me the junk mail pile to place in the blue bin; but as she often does, she took a quick second look to ensure no "real" mail was included in the junk mail pile. To my surprise, my wife pulled an envelope from the junk mail pile that had an investment company logo stamped on it and she then asked if I was sure this was junk mail. I did not recall seeing that envelope the day before (it must have been stuck in between some of the junk mail) so I opened the envelope and found a T3 inside. This T3 slip was just seconds away from becoming recycled paper and potentially putting me at risk for a 20% income tax penalty in the future, even though the T3 was for less than $100.

In honour of my T3 surviving its near recycling death experience, today I am going to recycle a blog post  I wrote last year on an insidious 20% penalty you will be charged if you fail to report income twice within a four year period.

To quickly re-iterate my blog post from last year, under Subsection 163(1) of the Income Tax Act, where a taxpayer has failed to report income twice within a four-year period, she/he will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. 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.

So besides my own experience, why am I recycling this topic again?  Two reasons. Firstly, a couple colleagues told me that they had clients who were charged the penalty in 2011 and secondly, our firm had a couple clients reassessed in the fall for slips they did not report on their tax return. These clients are now at risk of having to pay a penalty if they fail to report income again in any of the next three years. 

For those who are unaware, missing T-slips are an issue because the Canada Revenue Agency ("CRA") undertakes a matching program in the late summer or early fall, that cross-checks T-slip data it received from the financial institutions with the social insurance number of the T-slip recipient. If the T-slip has not been reported, the CRA issues a reassessment and the clock starts ticking for three more years.

You may be asking yourself how can this happen? Between the accountant and the client, shouldn’t someone be tracking all the tax slips? If you have a few slips, the answer is yes. But many people have multiple slips and actively trade or move money around. In addition, although you would expect that your investment institution would issue all the T-slips for your account, for some investments, such as money market funds, the money market company themselves may issue the T-slip, so you are not even expecting to receive such.

Income trusts are also often problematic. You would assume all your income trusts would form part of one all encompassing T3 slip from your broker. However, the same brokerage will often issue multiple T3 slips for the various income trusts you hold, even though they are all held in the same account; so often you have no idea how many T3 slips you should be receiving (to be fair, some of the major institutions provide a listing of slips that are outstanding).

Finally, people move, slips get stuck in junk mail as I experienced or the T-slip is lost in the mail.

An offshoot of this issue are accounts held jointly with parents and "In-Trust" accounts for children. Many parents open joint accounts with their adult children. The CRA when matching tax slips will look at the social insurance number ("SIN#") on the T-slip. Whether technically correct or not (a true joint account would require a 50/50 split of the income reported) the parent often reports 100% of the income. If for some reason the child's SIN# appears first, the CRA will often reassess the child for the missing income.

Similarly, where a parent opens an "In-Trust" account or even an account in their child's name, with the parents SIN#; even if the income belongs to the child (i.e. the child had a summer job) and should be reported on the child's tax return, the CRA will assume the income belongs to the SIN number on the T-slip and reassess the parent.

In both the above cases, you typically can convince the CRA the income belongs on your parents or child’s return and thus, the income was properly reported or at minimum, reported, just on the wrong income tax return. 

Finally, if you miss a slip, but receive it after you file, you can avoid this issue by filing what is known as a T1 adjustment request before the CRA finds the missing slip on its own.

Be aware, an innocuous missing tax slip in year one, could result in a costly 20% penalty in the future, if you somehow miss a more substantial slip in the three subsequent years.

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.

Avoid a 20% Penalty-Ensure you report every income tax slip, no matter the amount

This year, several of my clients received their T3 and T5013 income tax slips well into April. A troubling offshoot of the late receipt of these income tax slips is that many people either file their income tax returns assuming they have all their income tax slips, or run out of patience and file with the slips they have on hand. The two filing scenarios noted above are not problematic; as long as you file a T1 adjustment form upon the receipt of these late income tax slips to report the missing income. 

However, in some cases, people do not receive their missing slips because they have moved during the year or the slips are lost in the mail or mixed in with the junk mail that is thrown out. Since people either forget about these missing slips or are oblivious to the fact they are missing [It should be noted that the Canada Revenue Agency ("CRA") uses a matching program to ensure you have reported all your income tax slips] an insidious penalty provision registers strike one in an abbreviated two strike at bat.

You see, under Subsection 163(1) of the Income Tax Act,  where a taxpayer has failed to report income twice within a four-year period, she/he will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. 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.

One would think that the taxpayer relief provisions (“fairness provisions”) would address the potential absurd outcome that results, but this is not always the case as Ian Spence learned. Mr. Spence omitted a small amount of income in 2004 (I am not sure why, but it could have been the tax slip was lost in the mail or any number of reasons). This omission was strike one. Strike two was more costly. Mr. Spence had H&R Block prepare his 2007 return and for whatever reason $36,219 in employment income and the related income taxes were not included in his return. The CRA reassessed his return for the $36,219 in income not reported. It also reassessed Mr. Spence for another $124 in tax, the net amount of income tax owing after including the $36,219 and giving Mr. Spence credit for the $9,000 or so of income tax withheld on the missing slip. As this was strike two, the CRA also assessed a penalty of $7,243, a seemingly unfair result.

Two things must be noted at this point. (1) If Mr. Spence had omitted the $36,219 of income in 2004 and then omitted the small amount in 2007, the penalty would have been minimal. (2) The actual amount of income tax owing due to the second omission was only $124, while the penalty was $7,243.

Mr. Spence applied for relief under the fairness provisions. He was not granted any relief. He then applied to the court seeking a secondary review by the CRA and the court granted such. However, the CRA once again turned down Mr. Spence’s request under the fairness provisions. Finally, Mr. Spence went back again to the Federal court seeking another review. This time the Federal court dismissed the application.

The moral of this story is: ensure you file a T1 adjustment for any slip you receive late and if you are missing a slip, follow up with the issuer, as the CRA will most likely not be sympathetic to your case.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.