Confessions of a Tax Accountant -2014- Week 3

Traditionally, I have the largest intake of personal income tax returns the second week of April and this year was no different. This influx in returns is because clients feel they have received all their T-slips and they can finally provide me a complete set of income tax forms and related materials. Notwithstanding that expectation, clients are still receiving T5013 slips and the dreaded amended T3 slip. I am now telling clients that I cannot keep fixing returns for delinquent slips and though no fault of theirs, I am no longer re-running returns to account for a late or amended T-slip (I will just file a T1 adjustment in May).

The T1135 foreign reporting form is still wreaking havoc, but I will not whine again about this ridiculous form. This week I will briefly discuss how clients often neglect to tell us or provide information on self-employment business start-up expenses and capital losses and why it is in their best interests to do so.

Self-Employment Start-up Costs

I frequently find out a client has started a new business during the year, yet they have not provided me any of their expenses. The clients' thought process is; since they have had little or no income, the expenses are not deductible (no reasonable expectation of profit), or they think they will hold the expenses to claim next year.

As you may or may not know, the "old school" reasonable expectation of profit (“REOP”) doctrine was dropped by the CRA a few years ago after they lost several cases. Essentially if an activity is commercial in nature and does not have a personal element, there is no REOP test and the expenses are deductible.

Consequently, any start-up costs should be deducted in the first year (capital items must be depreciated) even if you have no self-employment income, as these expenses can offset your employment and other income.

Capital Losses

I have also found that clients who have capital losses sometimes do not provide the loss information, thinking it is useless if they don’t have capital gains in that year or that they will provide this information in a subsequent year when they have capital gains.

However, capital losses should be reported in the year they are incurred for two reasons:

1. If you do not report them, there is a good chance you will forget to report them in a subsequent year;

2. Capital losses can be carried forward indefinitely to be used against capital gains. Thus, there is no downside to start the clock ticking and you ensure the capital losses will not be missed or forgotten in a future year.

Management Fees – T3s

I have noticed that some T3s report management fees in the footnote box on the right hand side of the T3. It is easy to miss, so be careful to check that box, as these fees are deductible.

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.