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.

How the Principal Residence Exemption Works When You Construct a New Home

Several provinces have experienced booming real estate markets the last few years and some people have used the increased equity in their home to buy land and construct their dream home. In some cases, people sell their current home and rent until the new home is ready to occupy, while others continue to own and live in their present home and then sell it before they move into their new home.

In both these situations, people are often surprised at how the Principal Residence Exemption (“PRE”) must be calculated. Today, I will review what the possible tax consequences are under these scenarios.

Construction of a Home on Vacant Land

Where you acquire vacant land for the purpose of constructing a home for you and your family in a future year, the property cannot be designated as your principal residence until you and your family commence to ordinarily inhabit the newly constructed home.

Consequently, if the newly constructed home goes up significantly in value prior to you moving in, those years while the home was under construction may be problematic for purposes of the PRE. I review the details below.

The Principal Residence Exemption

As you may be aware, the PRE is a formulaic calculation that determines the amount of the gain on the sale of your principal residence that is exempt. I set forth the formula below:

The capital gain on the sale of your home multiplied by:

The number of years you have lived in your home & designated the property as your PR, plus 1 divided by the number of years you have owned the property

The one-year bonus is meant to ensure that you are not penalized when you move from one home to another in the same year. Thus, where you live in your home the entire time you owned it, you are typically not subject to tax on the sale of the home (don’t forget, you are now required to report the sale of your principal residence on your personal income tax return as I detailed in this recent blog post titled Reporting the Sale of Your Principal Residence). 

Income Tax Folio S1-F3-C2 Principal Residence

Income tax folio S1-F3-C2 sets forth a great example of how the PRE works where you have constructed a new home. The example (2.29) is as follows:

“In 2002, Mr. A acquired vacant land for $50,000. In 2005, he constructed a housing unit on the land, costing $200,000, and started to ordinarily inhabit the housing unit. In 2011, he disposed of the property for $300,000. Mr. A’s gain otherwise determined on the disposition of the property is equal to his $300,000 proceeds minus his $250,000 adjusted cost base = $50,000 (assume there were no costs of disposition). Mr. A can designate the property as his principal residence for the years 2005 to 2011 inclusive, but not for the years 2002 to 2004 inclusive because no one lived in a housing unit on the property during those years. The principal residence exemption formula cannot, therefore, eliminate his entire $50,000 gain otherwise determined, but rather can eliminate only $40,000 of that gain, as shown in the following:

Applying the formula A × (B ÷ C):

A is $50,000

B is 1 + 7 (being tax years 2005 to 2011)

C is 10 (being tax years 2002 to 2011)

= $50,000 x (8 ÷ 10)

= $40,000”

How the Principal Residence Exemption Works When You Continue to Own Your Current Home While You are Constructing a New Home

So, what the heck happens when you have a home and build a new one? Essentially two things:

1. As noted in the CRA example above, for the years you did not ordinarily inhabit the new home while it was under construction you will at most only be able to protect one year of those years you did not inhabit the home from being taxable when you eventually sell.

2. If your old home had a yearly gain smaller than the yearly gain on the home under construction before you move in, you cannot save (not designate) those years with the larger gain on the newly constructed home.

What this means is the following. Typically, you would suspect the result would be similar to where you owned say a home and a cottage. In those circumstances (since you ordinary inhabit both properties) where you sell your home, if your home went up $5,000 a year in value and your cottage for example went up $25,000 a year, you would likely not designate all the years to your home, since you would want to save as many years as possible of your PRE exemption for when you sell the cottage (since you would be saving $25k a year versus $5k a year) and pay some tax on the sale of your home.

However, where you had a home under construction for say three years that goes up in value $25,000 per year, you will not have the option to not designate all three years on your home sale and you can at best only protect one year, because you did not ordinarily inhabit the home under construction. Yes, I know, clear as mud.

Clearly this is a very fact specific situation, but the income tax result is often an unexpected tax hit. In any case, I strongly suggest you obtain income tax advice if you are in this situation, since it is obviously extremely complex.

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.