Post Tax Season Assessment and Filing Issues

This year I have had multiple client queries in respect to their Notice of Assessments (“NOAs”) which reflect tax balances owing, despite the fact the taxes were paid in April. Today I discuss this matter and a couple other issues, that have arisen after April 30th.

Notice of Assessments

Typically, taxpayers file their personal tax returns, pay their tax owing (or wait for their refund), start golfing and gardening and probably don’t give much more attention to their taxes until they receive their NOA. Upon receipt, they may take a quick glance to ensure no tax is owing, maybe make note of their RRSP contribution limit and then throw the NOA into a file.

This year, many taxpayers have done a double-take when reviewing their NOA, since their assessments are reflecting tax still owing. I have had a several clients call me in a panic asking if their return was incorrectly filed since the CRA has assessed them more tax? I quickly put their minds at ease. I tell them that what has happened is the CRA is moving to “express” NOAs and has issued the notice so quickly that their system has not yet had time to match the tax payment (this applies more specifically to people who pay their balance owing at the same time or within days of  filing their return). I would bet that many of you who owed tax this year had the same issue with your NOAs.

While the NOA expediency is impressive, they are actually being issued too fast (imagine that, complaining the CRA is too fast :) and are leading to some confusion. Perhaps the CRA should consider waiting a little longer to issue NOAs, so that for those people who pay their tax owing right away, the payment can be reflected, such that the NOA will not reflect a balance outstanding, where there is in fact, no tax due.

The assessment wording has also caused some confusion for those taxpayers who have filed T1135 Foreign Income Reporting Forms. The NOA states that if you indicated you owned foreign property, you have to fill out Form T1135 and send it to them if not already done so. Several of my clients have called to ask if we forgot to send in their T1135, when in fact, the NOA is just reminding people that if they said yes, they had to file the T1135.

Alimony

I have also had a couple clients who pay alimony receive NOAs that have reduced their alimony claim. The NOA says the agreement the CRA has on hand shows they are not entitled to the alimony deduction claimed. It is a little unclear at this time whether this is just an issue where agreements have been amended to change alimony and the CRA has not been provided the new agreements, or the CRA is factoring in non-deductible child support to reduce the alimony claim. In any event, I think both the CRA and taxpayers would be best served if where an alimony claim is made that differs from the CRA records, the CRA does not issue a NOA, but sends an information request asking the taxpayer to explain the variance and support the claim. This would save a lot of time and frustration on both the taxpayer and CRA side and reduce a number of T1 Adjustment Requests and Notice of Objections.

Information Requests

Finally, just a reminder: if you receive an information request to provide the CRA back-up for any expense or claim you made on your return, you typically have 30 days to respond. Either do so within the 30 day time period, or request an extension far in advance. Do not ignore the information request or your return will be assessed without the deduction or expense.

Hopefully you had a refund in 2017 and have not had to deal with any of the above concerns.

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.

T1135 - Some Guidance on Common Issues

I have written multiple blog posts over the last few years on the T1135 Foreign Reporting Income Verification Statement. I have no interest in writing one more time on how to complete the form, but I thought I would provide you some guidance on some common questions I receive.

U.S. Bank Accounts and other Foreign Accounts

Cash situated, deposited or held outside of Canada even if in Canadian dollars is considered specified foreign property and subject to reporting on the T1135.

So, if you hold a $U.S. denominated bank account with a Canadian Financial Institution, you do not need to include the account on your form T1135. However, if you have a bank account with a U.S. or foreign bank you must include that account on your T1135.

Mutual Funds & ETFS

Mutual funds that are resident in Canada do not need to be reported, even if they hold foreign stock. However, any mutual funds not resident in Canada must be reported.

To the best of my knowledge, the CRA has not definitively answered how to treat ETFs. What they have said is that for the purposes of country reporting, the residency of the mutual fund or exchange traded fund itself is the country of the investment. Thus, one can seemingly infer that ETFs that are resident in Canada would be excluded from reporting. That may be easier said than done and some people make that determination based solely on whether there is a Canadian tax slip issued (inferring the ETF is thus Canadian resident). How is that for an opaque answer? 

Canadian Stocks denominated in $U.S. 

A Canadian stock denominated in $U.S. held at a Canadian brokerage does not need to be reported on the T1135. It is residence of the issuer that is the determinative issue, not the denomination.

Joint Ownership

Jointly owned investments must be split for purposes of the T1135. Thus, if you and your spouse jointly own U.S. stocks with a cost of $160,000 Cdn, you are each considered to own $80,000 of U.S. stocks. Each spouse must then independently calculate whether they have other foreign assets that would cause them to exceed the $100k threshold (i.e. you have more than $20k in other foreign assets).

Personal Use Property

If you own a personal use property outside of Canada, it is excluded from reporting. This will include a U.S. Condo, European Villa, time share or similar property. If there is incidental income, that income does not disqualify the property, as long as the primary use is personal use. This can be very subjective, so be careful.

New Immigrants and Returning Residents

An individual does not have to file Form T1135 for the tax year in which he or she first become resident in Canada. However, if you were formerly a Canadian resident and are returning, the exemption does not hold and you must file a T1135 from the entire year.

Gross Income for Rental Properties

The T1135 form asks you to report your income for real property. One would think that means you are required to report the net rental income (gross rental income less rental expenses), however, you are supposed to report just the gross rental income on the form and ignore the related expenses.

The above guidance is based on various CRA comments and CRA documents I have read. The CRA is not bound by any of the above, so I take no responsibility for the accuracy of the above guidelines.

Note: I am sorry, but I do not answer questions in April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.

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.

The T1135 Form – Yet Again! & Hiring The Blunt Bean Counter

This will be the fifth time I am writing about the T1135 Foreign Income Verification Statement since September, 2013. Today I am discussing the implementation of the April, 2015 Federal budget proposal in which the Conservatives promised to simplify the reporting requirements where your cost of foreign property is less than $250,000.

This proposal has now been implemented and a new T1135 has been released. Here is a link to the new form.

Qualifying for the Simplified Method

The basic requirement to file a T1135 form is still in place. That being, if you own specified foreign property with a cost of more than $100,000 at any time in the year, you must file the form. However, now where you own specified foreign property with an adjusted cost base of more than $100,000 and less than $250,000 throughout the year, you can file using the simplified method (or you can still use the detailed reporting method if you wish, but why you would is beyond me). Note, if your cost exceeds $250k at any time during the year, you cannot use the simplified method.

The simplified method is reported on Part A of the form. While this method is less onerous than the detailed reporting requirement, you will now be required to report the top three countries based on cost during the year under the simplified method. This determination will require some work if your broker does not provide such, or you are a do-it-yourself investor. 

Filing Online and Reassessments

It should be noted you can now file the T1135 online for 2014 and subsequent years. The CRA has also re-iterated that the period for reassessing your return is extended by three years if you have failed to report income from a specified foreign property on your return and Form T1135 was not filed, was not filed on time, or was filed inaccurately.

While the simplified reporting method is better than nothing, I would suggest that most accountants and taxpayers still don’t understand why the T1135 form is required at all, where all you are only reporting is foreign holdings held with your Canadian institution(s).

Hiring The Blunt Bean Counter

I am often asked by readers if they can engage me for various income tax, accounting and wealth management services. Although I rarely if ever, self-promote on the blog, today, I am going to make an exception. Below I’ve listed the various services my national accounting firm and I can provide to you.

Corporate Income Tax Planning

To help you minimize your corporate income taxes, we provide tax planning services including but not limited to: corporate reorganizations, estate freezes, purifications for the capital gains exemption, assistance with indirect taxes such as HST, in-bound and out-bound foreign tax planning, R&D claims, transfer pricing and valuations.

Corporate Financial Statements

To ensure all your corporate compliance needs are met, we typically provide the following services to owner-managed businesses: financial statement preparation, corporate tax return preparation, corporate and personal income tax and estate planning and personal tax return preparation for the business owner.

Estate Planning and T3 Estate Tax Returns

Many people are concerned about ensuring they minimize their taxes upon death and/or leave a legacy to their family. To assist you, we provide estate planning, which typically involves determining your estate tax liability and then trying to minimize and/or manage this liability through tax planning and will planning (with your lawyer). In addition, where you have had a family member pass away or are named executor to an estate, we can assist you in filing the required estate tax filings (which are often very complicated in the year of death, especially if the assets do not pass to a surviving spouse, due to the deemed disposition rules).

Wealth Management and Financial Planning

Most people are concerned with ensuring they have enough money for retirement. I am involved with quarterbacking my client’s wealth and retirement planning, typically starting with a financial check-up and financial plan. As financial quarterback, I try to ensure your investment advisor, lawyer, insurance agent, banker, business consultant integrate their advice into one efficient, optimum, coordinated plan, taking into account your investment, retirement, income tax and successions needs.
 
If you do not have an investment advisor or are looking for a new advisor, we recommend you meet several to find a fit from both an investment perspective and also from a personal relationship perspective.

Accountants cannot provide investment advice. We do however; work closely with several highly respected investment advisors whom we can introduce you to. The advisors typically require a minimum of $1,000,000 of investable assets (yes, I am aware, this is a large issue for people who are looking for a good investment advisor, but do not meet the minimum asset requirements). 

Personal Tax Planning

To help you reduce or minimize your personal taxes, my firm has several excellent tax people who can assist you with personal tax planning and tax return preparation. Unfortunately, because income tax season has essentially become condensed into one month (since the T3, T5013 slips do not arrive until early April at best) I now only prepare personal tax returns for my corporate or wealth clients.

If you would like to engage me or my firm for any of the above noted services, or want to discuss your specific situation and obtain a quote for services, feel free to email me at bluntbeancounter@gmail.com or click the hire The Blunt Bean Counter at the top right of the page.

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.

2015 Federal Budget

The Federal Minister of Finance, Joe Oliver, yesterday presented the 2015 Federal Budget. It is a good thing Joe was giving away tax goodies, because announcing a budget with 9 days left in income tax season does not make many accountant friends :)

There was much to like in this budget. The proposed increase in the Tax-Free Savings Account ("TFSA") limit, the proposed reduction in the minimum withdrawal for Registered Retirement Income Funds ("RRIF") and the proposed reductions in small business tax rates. It will be interesting to see if these changes ever get to see the light of day.

As I am in the home stretch of tax season, I don't have the time for a detailed analysis of the budget, so I will just offer some brief comments.

TFSAs

As rumoured, the contribution limit for TFSAs will be increased from $5,500 to $10,000 per year effective January 1, 2015. However, the new limit will not be indexed. This proposed change has the potential to drastically alter the way Canadians save and plan for retirement. On Monday, since everyone has already told you how great this is, I will discuss the downside to this change.

RRIFs

The government proposes to lower the annual required withdrawal from your RRIF. Currently at age 71 the required withdrawal rate is 7.38%. The budget proposes to lower that rate to 5.28% as of January 1, 2015. Withdrawal rates will still increase every year, but instead of topping out at 20% at age 94, that cap is reached at age 95. RRIF holders who at any time in 2015 withdrew/withdraw more than the reduced 2015 minimum amount will be permitted to re-contribute the excess.

This change appeases seniors who felt they were being forced to draw more money than they required to live and takes into account the longer life expectancy of Canadians.

The Matching Penalty

Readers of this blog will know that one of my major pet peeves is the excessive 20% penalty for unreported income (that is often inadvertent or the result of lost slips in the mail) that is picked up each year by the CRA's matching program.

The penalty currently can be levied even if you owe no income tax. I.e.: If someone in Ontario fails to report a T4 slip with $10,000 of employment income and the slip has reported $4,900 of income tax deducted, they would owe no income tax, at the maximum marginal income tax rate. However, if you had failed to report income in any of the three prior years, the penalty under subsection 163(1) would be $2,000 (20% x $10,000), even though you owed no income tax and the CRA was provided this information by your employer.

The government will amend this penalty to prevent situations such as the above where there is a disproportionate penalty to the actual income tax. The budget proposes that the penalty will now only apply if a you fail to report at least $500 in income and more importantly; the penalty will now be equal to the lesser of 10% (penalty is 20%, as there is also a 10% provincial penalty) of the unreported income and 50% of the tax unpaid. Thus, in the example above, there would not be any penalty under the proposed legislation, as no tax would be owing.

T1135 Foreign Reporting Form

The government proposes to simplify the reporting requirements where the cost of a taxpayer's foreign property is less than $250,000. While this change is welcome, it falls short. Most accountants and taxpayers were hoping the form would only require reporting of foreign income earned outside of Canada and would exclude the detailed reporting required for accounts held with Canadian institutions.

Small Business Tax Cut

It is proposed the 11% Federal small business tax rate on active income for qualifying Canadian Controlled Private Corporations will be reduced by .5% annually beginning January 1, 2016 and will drop to 9% by January 1, 2019. The dividend gross-up and credit will be adjusted each year to reflect the lower corporate tax rate.

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.

Confessions of a Tax Accountant

From the inception of my blog, I have written a weekly confessional during income tax season discussing interesting or contentious income tax and filing issues. This year I have abandoned the "confessions" as I figured I would probably just complain about the Foreign Reporting T1135 Form for six straight weeks – and I did not want to inflict this upon you. However, today for old time's sake, I will bring back the confessions for a guest appearance.

As usual, I only received about 40% of my client's tax returns before April 1st as they were waiting for their T3 and T5013 slips (by the way, the fact the T5013 essentially only has numerical  boxes with no written descriptions drives most accountants mad). For many of the returns that arrived before March 31st I did not even attempt to complete them because I knew there were additional tax slips to come. I must get 15 emails a day with the email header “opps, I just received another tax slip”. No one cares about this other than accountants who have to do all their work in a condensed three-week period, so I will stop the whining now. This is why I stopped with these confessions, it just provides me a license to grumble.

In all honesty, there have not been that many new issues this tax season. The same old issues are always there. For many accountants, the biggest issue is how much time they spend chasing down information and preparing the T1135 Form, let alone the additional cost to clients. However, one new issue that has arisen a few times this year, as result of the Family Tax Cut, is co-coordinating the family claim when spouses and/or common law spouses use different accountants, or one spouse prepares their return themselves. I write about this issue below.

An Accountant for each Spouse

Do you and your spouse have your tax returns prepared by different accountants or is one of you a do-it-yourselfer? If so, I suggest, (especially if your family can access the family tax cut) you reconsider this decision next year, as you may be missing out on some significant tax savings.

Spouses may choose to use separate accountants for some of the following reasons:

• secrecy

• a spouse may like to keep his/her finances separate (i.e. he/she only contributes to a joint account to pay household expenses)

• one of the spouses really likes his/her accountant and has a history with them and does not want to change accountants.

Using two accountants may result in either the family not utilizing all its tax credits and deductions or the more common issue, they duplicate claiming credits and deductions; which may cause the CRA to re-assess and/or request family information that is often time consuming to obtain and provide.

This year the possible dysfunction in using two accountants has been exacerbated with the family tax cut. Now, a decision must be made as to which spouse will make the claim and the claimant requires various tax information from their spouse that is not readily available to the accountant preparing the return.

In addition to the family tax cut, a couple will benefit from a single accountant preparing both returns in respect of these deductions and credits:

a) Child care expense

b) Child credits such as the fitness and arts credits

c) Medical expenses

d) Charitable donations

Furthermore, where you and your spouse have joint investment accounts and don’t use the same accountant, it is cumbersome to report split interest, dividend and capital gains income. In these cases, there is often either duplication in reporting income or one spouse misses reporting their ½ of their income entirely.

For the reasons I note above, let alone the extra tax preparation costs, I suggest you and your spouse or partner consider using the same accountant to effectively capitalize on the spousal and/or family benefits.

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.

T1135 Foreign Reporting Form – 2014 Update

The T1135 Foreign Income Verification Statement has to be the most problematic tax form in history. Readers of my blog know that I have written multiple times on this topic and will do so again today, to update you about the changes to the form for 2014. Not only has the form and the reporting requirements changed several times over the last couple of years, the form continues to cause confusion for taxpayers and professional accountants alike. I understand there are still ongoing discussions with the Canada Revenue Agency by representatives of both the accounting and investment industries, as the form is still considered to be too complicated by many.

Complicated or not, the form and rules have changed for 2014 and I provide below a quick review of the rules and discuss some of the changes for 2014.

The General Rule

The T1135 must be filed by individuals, corporations, trusts and certain other persons who own specified foreign property ("SFP") costing in total more than $100,000 CAD at any time during the year. Note the word costing. That means you use the adjusted cost base, not the fair market value of the investment.

Exceptions

Some common exceptions to the reporting requirements are as follows:

•  RRSPs are not reportable

• Foreign property held in a Canadian mutual fund is not reportable. E.g.: Even if the Canadian fund owns U.S. stocks, the fund is not reportable.

• U.S. cash held in a Canadian Institution is not reportable.

• Personal use property (e.g. Florida Condo) that is used exclusively by the taxpayer as a vacation property is not reportable. However, foreign personal use real estate can get complicated. If for example, you rent out the property for eight months of the year with a reasonable expectation of profit and use the property for personal use the other four months it must be reported. However, if the property is rented out for part of the year without a reasonable expectation of profit, (just for the purpose of recovering a portion of condominium expenses) than the property is most likely not reportable. If unsure, I would suggest you file the form to be safe.

Extension of Reassessment Period

It is very important to note that the reassessment period, starting in 2013, is extended for three additional years if the following conditions are met:

• you failed to report income from a SFP on an income tax return and
• the T1135 was not filed, was not filed on time, or was filed inaccurately.

Thus, missing just one minor investment might be sufficient to extend your assessment period a further 3 years.

Changes for 2014 T1135 Reporting

The following are some of the key changes for 2014:

• The form can be Efiled by individuals

• The option to check the box where income is reported on a T3 or T5 is no longer available

• A revised aggregate reporting method is available, but is much more complicated than last year’s version

• For accounts with Canadian registered securities dealers or federally or provincially regulated trust companies, there are now two choices:

(1) Under Category #2, enter the Country Code, maximum cost during the year, cost at year-end,income (loss) and gain (loss) if applicable for each individual investment or

(2) Use the 2014 aggregate reporting method (i.e.: report by country for each investment account, rather than for each individual stock and bond held in the investment account as per #1 above). So for example. If you have an account with say TD Bank and in that account are 5 stocks, companies A,B,C,D&E, you can either report the details of A,B,C,D&E individually or just report A-E as an aggregate which is far simpler (subject to the country by country reporting discussed below).

For the aggregate reporting method you will use Category 7 of the form and you will be required to report the following details in aggregate for each investment account:

• The highest Fair Market Value (“FMV”) during the year (which can be highest month end FMV) of foreign property

• FMV of foreign property at year end

• Gains/losses on the SFP for each investment account being reported

• Income/loss on SFP for each investment account being reported

Again, because you can report using the FMV under Category 7, which can be taken directly off your monthly investment statements, it is typically a far simpler choice than using Category 2 which requires you to use a cost basis which most people have to dig up from old records.

Country Reporting

For 2014 you must segregate the category 7 amounts by country.

• The country determination will generally be where the company/trust/issuer is resident (easier said than determined in many cases)

• If you can’t determine the country of residence, the CRA says it is acceptable to use “other” for country

• You will be pleased to know you are required to work through SFP on a country-by-country basis to determine which month is highest, and then report that balance.

Foreign Exchange Conversions

As discussed in my blog post last week, if your financial institution or investment firm does not do this for you, you will need to convert foreign holdings to Canadian dollars as follows:

• For highest month-end FMV – can use average rate

• For the FMV at year-end – use the closing rate

• For the income/(loss) – can use average rate

• For capital gains/losses – you are required to calculate gains on schedule 3 using historical rate. The T1135 capital gains should agree to what you report on schedule 3 of your return.

Many had hoped that the various concerns of taxpayers, accountants and financial institutions would have caused the CRA to simplify this form. However, as you can see, the T1135 is just getting more and more complicated.

Note: As I discussed last week, I have disabled the comment/question feature of the Blog. I just do not have the time to answer questions during income tax season (this includes emails to my BBC or business email accounts). I know this will not be popular in respect of this post, based on the fact I have had over 225 questions and comments on my prior T1135 blog posts. I apologize in advance and thank you for your understanding. Hopefully the link I provide below will answer any questions you have.

Since I am not answering your questions, I will direct you to the Chartered Professional Accountants of Canada blog, that answers many questions. Hit the link to "list" in the second paragraph. There are 143 questions asked about the form, many for which the CRA provides a response.

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.

Form T1135 – Permanent Changes for 2014 and Beyond

Last year I wrote several times about the onerous requirements proposed by the Canada Revenue Agency (“CRA”) in respect of Foreign Reporting and the related Form T1135, for taxpayers that held foreign investments with a cost of $100,000 or more. The proposed changes caused a huge compliance issue for financial institutions, accountants and taxpayers alike. As a result, the CRA eased its initial requirements and announced in late February, 2014, that for the 2013 tax year only, taxpayers could elect to report based on much less strict “transitional rules”.  

After further consultations with external stakeholders, the CRA announced that it has implemented several permanent changes to Form T1135 for the 2014 and later tax years. For the typical Canadian investor who holds foreign stocks, bonds and funds with Canadian institutions, these changes will simplify life substantially from the initial proposals. For those Canadians who own stocks, real estate, etc. outside Canada, the rules remain arduous. The changes are detailed below:

• Foreign property held in accounts of Canadian registered securities dealers or a Canadian trust company will have the option of reporting foreign property using the “aggregate reporting method”, whereby the aggregate value of all foreign property in an account is reported rather than reporting the details of each property. If this reporting method is chosen, all property held within a Canadian registered securities dealer or a Canadian trust company must be aggregated on a country-by-country basis. Aggregate totals for the income earned and the gains/losses realized from all dispositions in the tax year must still be reported on a country-by-country basis.

•  For investments which qualify for reporting under the “aggregate reporting method”, the amounts to be reported, on a country-by-country basis, will be the total highest month-end fair market value for the year and the total fair market value at the end of the year. (This is pretty much what the transitional rule was for 2013).

•  The 2013 transitional Form T1135 provided a reporting exclusion if the taxpayer received a T3 or T5 slip from a Canadian issuer in respect of a particular specified foreign property. For 2014 and thereafter, the T3 or T5 slip exclusion has been eliminated, therefore all income will have to be reported regardless of whether a T3 or T5 slip has been issued. Although this exclusion made things easy for some people in 2013, the fair market requirement allows you to basically just review your investment statements for 12 months and report the highest market value and then just report your December 31, 2014 market value. The only time consuming task will be to summarize your income earned and capital gains realized for the year. However, many institutions and investment managers will likely summarize all or most of this information for you.

The CRA only accepted the 2013 version of Form T1135 for the 2013 taxation year and the 2014 taxation year until July 31, 2014. The 2014 version of Form T1135 must now be used for 2014 and later tax years. Here is the new version of the T1135. For the "typical Canadian", you will only be concerned with category 7.

Options

I have been asked a couple times about the reporting of options for T1135 purposes. One of my tax managers spoke to a CRA representative and was told that all options (including sold cash secured puts, covered calls, bought and sold in-the-money calls) should be included on Form T1135 under “Category 6 – Other Property Outside Canada” as specified foreign property pursuant to subsection 233.3(1) - “a property that is convertible into, exchangeable for, or confers a right to acquire a property that is Specified Foreign Property”. The CRA representative noted that as of August 1, 2014, these amounts should be reported under the new Category 7 using the aggregate reporting method assuming that the options are held in an account with a Canadian registered securities dealer.

Finally, the CRA told us that the cost amount would be the acquisition cost of the option, and not the value of the stock exposure.(Please be advised this is telephone advice and the CRA, Cunningham LLP and myself make no representation as to its accuracy). 

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 -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.

The Dynamics of the Investment Advisor/Accountant Relationship

I have several clients in common with Pat O’Keeffe, First Vice-President and Investment Advisor at CIBC Wood Gundy. Pat and I have often discussed the dynamics of the relationship between the investment advisor (“IA”) and the accountant (“CPA”), and why our relationship works while other IA/CPA

relationships fail. One of Pat’s responsibilities with Wood Gundy is continuing education, in which he is charged with the responsibility of improving the quality of service the IAs offer and to increase their knowledge on all aspects of being a leading edge advisor to higher net worth clients. Pat thought it would be instructive for me to speak to his advisor group in downtown Toronto (which I did a few weeks ago) to provide an accountant’s perspective on the dynamics of this relationship. I summarize my talk in today's post. [Note: I use CPA above because that is my designation. I am not purposely slighting other accounting designations, so please do not send me nasty emails].

I understand some aspects of this post may come off as arrogant, as I am telling IAs what to do and how to act. However, I know I don’t have all the answers. Please also understand I was asked to speak to the CIBC Wood Gundy advisors from a CPAs perspective and this is my interpretation of the relationship and I am blunt (and some would say a bit arrogant :).

You may be asking yourself, why the heck should you care about the IA/CPA relationship? I suggest that my expectations of an IA should become the minimum expectations you have of your IA.

Although I do not discuss this today, if you have a team of advisors, you need to ensure your IA, CPA, lawyer, insurance agent and banker all integrate their advice into one efficient coordinated plan. If your advisors operate at cross purposes, while trying to protect their own fiefdom and fees, you are the ultimate loser in this battle of professional egos.

How the Ideal IA/CPA Relationship Should Work

During my presentation, I suggested and it was agreed upon by the CIBC advisors present, that the ideal IA/CPA relationship should be as follows:

• Client centric – The best interests of the client should always be the first priority

• No turf battles – Many financial issues have an investment and tax component. It is important the IA does not overstep their expertise and provide tax advice to cut out the CPA, while the CPA needs to stay within their tax and advisory expertise and not attempt to provide investment advice. I know I have a good relationship with an IA when they call me for tax or financial advice on clients I have no vested interest in; because they know I will help them with their client. This also works the other way where I can call an IA for an opinion on what another IA is doing or for an explanation of an insurance product, etc.

• Proactive – Whether the IA has a new insurance idea or the CPA thinks a prescribed rate loan is appropriate, the IA and CPA should work together to ensure they are providing proactive advice before the client hears it at a cocktail party or seminar put on by another IA or CPA.

• Financial Hero’s – In a strong IA and CPA relationship, the synergies of the relationship should result in both parties becoming hero’s in the client’s eye. For example, an IA recently referred me a client that was not a good fit for the firm she was using. By working together with the IA and because of my knowledge and experience in working with owner-managers, we were able to not only lower the client’s fees, but provide more practical and proactive income tax advice. The client was very pleased with both of us.

The Accountant is the Trusted Advisor

During my presentation, I suggested to the IAs that some studies have concluded that the CPA is the client’s most trusted advisor. I further suggested that whether they agreed or not with that assertion, they needed to understand and acknowledge that dynamic. Although, I work very well with many IAs, over the years I have had reason to suggest to a few clients that their IAs were weak and should be replaced. In most cases they have replaced their IAs. My point here; if you are an IA, you should try and work with your client’s CPA, as it is in your own interest to have them as an ally as opposed to an enemy.

The Grey Areas of the Relationship

The following issues are often contentious and can cause a fracture in the IA/CPA relationship:

1. Who is responsible for determining the adjusted cost base of a personal tax client’s investments?

Most CPAs feel it is the IAs responsibility in all cases for personal clients. During my presentation, there was full agreement by the CIBC advisors on this point. The reason for this is unless an CPA is specifically engaged to track a client’s stock investments, they have no idea what stocks and bonds their clients are buying throughout the year and they have no reason to track such.

2. Who is responsible for determining the adjusted cost base of a corporate client’s investments?

The IAs again felt this was their responsibility. I surprised them by stating that in this case I felt we had a joint responsibility, since for corporate clients, CPAs track the ACB of the client’s investments when we prepare their financial statements.

3. Who is responsible for providing information to complete the T1135 Foreign Income Verification Form?

As I have discussed several times on this blog, the new reporting requirements that force taxpayers to report individual stocks held in Canadian Institutions that do not pay dividends (postponed until 2014 as per the recent transitional announcement) will be a massive issue next year. IAs told me they consider the determination of the fair market value of foreign stocks held during the year, their responsibility. However, they noted that should the rules not change for 2014; the systems of all Canadian Financial Institutions will need to be tweaked to provide reporting on the dividend exception issue.

4. Who is responsible for Income Tax Attributes?

I suggested it was the CPAs responsibility to provide the IA any capital loss carryforward information and RRSP and TFSA contribution limits. However, I told them I thought it was the IAs responsibility to contact the CPA to confirm this information before making any of these contributions.

How to Lose the Accountant as Your Advocate

During my presentation I suggested to the IAs that the following actions or inaction could alienate their client’s accountant:

1. Give the CPA a hard time when they ask for duplicate tax slips. We are only asking because the client did not receive the slip or has misplaced the slip.

2. Don’t provide the CPA adjusted cost base information or realized capital gain/loss reports. As noted above, in my opinion, this is clearly the IAs responsibility.

3. Don’t assist with flow-through information. Flow-through limited partnerships are a strange animal. They start under one entity and are converted into a mutual fund typically a couple years later. CPAs often have a hard time following the conversion process because (a) the share conversions are never one to one, so it is hard to know which flow-through was converted to which mutual fund and (b) it is very time intensive work sorting this out and CPAs do not have time to waste on this during tax season.

4. Practice income tax. In prior years I have had a couple clients' IA transfer stocks with huge unrealized capital

losses to their RRSPs. The result, the tax-loss is denied and lost forever. I have also had IAs suggest to clients that they purchase very large quantities of flow-through shares without discussing their suggestion with me. Clients can become very upset with their IA when I prepare their income tax return and tell them they owe substantial minimum tax because of the excessive flow-through purchase. I have also seen IAs make transfers for probate purposes without considering the income tax costs amongst many other transgressions.

How an IA can Lose a Client

I suggested to the group that the following acts may cause them to lose a client:

• Not taking into account the client’s area of business. For example, should your asset allocation be heavy in REITs if the client’s personal corporation holds significant rental properties?

• Cause a RRSP or TFSA over-contribution because you did not confirm the contribution limits with the CPA. I don’t think IAs understand how upset clients get when this happens and what a huge strike this is against them over such a small issue.

• Have client pay tax on capital gains when the client has large unrealized losses. In November, I touch base with many of my client’s IAs, or they call me, to discuss whether there is an opportunity to tax loss sell. Although it may make investment sense to not sell stocks with unrealized losses, IAs need to speak to their clients in November or December to explain their rationale for not selling; so the client is not upset in April when they incur a large income tax bill.

• Don’t review annual returns with clients. Most IAs are very good about this, but if you ignore your client and don’t have at minimum a yearly meeting, know that I am asking my client if they have reviewed their returns for the year with you. If  they say no, I will usually figure it out myself and then compare the returns to index returns. 

Finally, if you're an IA, the reality is I like many other CPAs; prefer to work with other quality advisors, whether they are IAs, lawyers, valuators, bankers etc. For both yours and your clients benefit, you should strive to be one of those quality advisors.

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.

Income Tax Preparation Tips

As promised last week, here is a summary of the Tax Tweet Tips I posted last year (in many cases, expanded from the 140 character limit imposed by Twitter). I have updated these tips to assist you in preparing your 2013 personal income tax return

Tax Tips for Preparing your 2013 Return

1. If you sold stocks or real estate in 2013, ensure you have the original cost documents. 

Note: This issue is twofold. Firstly, you should always maintain stock purchase confirmations or the annual summary to substantiate the adjusted cost base of any stock purchases. You also must maintain the original reporting letter and statement of adjustments for any real estate purchase. Secondly, many people do not keep receipts (or they may have paid cash) to substantiate cost base additions to their rental properties or cottages. Without these documents, you may have a difficult time convincing the CRA that the adjusted cost base of your real estate is higher than the original purchase price.

2. Confirm your 2013 installment payments online. Alternatively, there is a summary of the 2013 installments you paid on the back of the 2014 installment reminder the CRA just sent you.

3. Interest expense related to your investment accounts is often missed. Check the bottom left of your T5 summary for the interest you paid during the year.

4. If you sold collectibles in 2013, such as coins, stamps and china, they may not be taxable if your proceeds were <$1,000.

5. Canadian residents who are also US citizens or Green Card holders must file a 1040 US return. If you are a Canadian resident earning Rental Income in the US, you must file a 1040NR.

6. Do you own shares in any delisted, bankrupt or insolvent companies? You may be eligible to file an election to claim the capital loss this year.

7. When filing a deceased parent/grandparent’s return, ensure you report any deemed dispositions of stocks or real estate.

Note: Upon passing, if property is not transferred to a surviving spouse, the deceased taxpayer is deemed to have disposed of their capital property at death as if they actually sold the shares or real estate. The determination of the cost base of that property can often be problematic to say the least.

8. File returns in the year your child turns 18.They may be eligible for some claims at 18 and others at 19 are based on their age 18 return.

9. If you sold capital property in 2013 that was held prior to 1994, review whether you elected to bump the value in 1994.

Note: In 1994 the $100,000 capital gains exemption was eliminated. However, you were entitled to make a final election to use your capital gains exemption on stocks, real estate etc. Many people forget they made such an election and that their cost base on certain property is higher, which reduces the capital gain to be reported. This election was used extensively by people on their cottages. So if your parents sold their cottage in 2013 remind them to check if they made the election in 1994.

10. Do you pay investment counsel fees to an investment advisor? If so, they are deductible.

11. If you have a Line of Credit for investment purposes, check your December, 2013 statement for a summary of the interest you paid in 2013 & claim the interest expense that related to your investments (you may have to apportion that expense if you co-mingle your LOC with personal expenses).

12. Did you own foreign property with a cost of over $100,000 at any time during the year? If so, you must file Form T1135.

13. If you sold a US stock in 2013, use the F/X rate from the year of purchase to determine the cost and use the 2013 rate for the proceeds. You have two choices. Either use the actual F/X rate on the day of purchase and sale, or you can use the CRA's yearly average rate however, you must be consistent.

14. Did you sell a REIT in 2013? Reduce the ACB by the return of capital from prior years.

15. Last tip. Don’t file your return late no matter what! There’s a 5% penalty + another 1% per month up to 12 months. Even if you cannot afford to pay the tax due, file your return to avoid the penalties. You can usually make arrangements with the CRA to pay off your tax liability over time if you provide reasonable terms of repayment.

Hiring The Blunt Bean Counter

This is the time of the year when I’m frequently asked by readers of The Blunt Bean Counter to provide individual tax preparation services. While it is truly is an honor to receive these types of inquiries, my tax practice at Cunningham is focused on corporate tax, estate planning and financial advisory.

Unfortunately, these days, Chartered Professional Accountants only have about 3-4 weeks to complete the majority of our personal income tax returns, because most of our clients T-slips do not arrive until early April. This circumstance has forced me to narrow the scope of my tax compliance practice and I typically reserve the time I do have available to prepare personal tax returns for the owner-managers of the companies that I service. Consequently; I am unable to take on any additional personal income tax return work for non-corporate clients.

I am actively taking on new corporate clients and welcome direct company inquiries and referrals. My contact information is noted on the right-sidebar, just above the little trophy.

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.

Gone Golfing

Today will be my last blog post until September. I have decided to take a summer sabbatical from blogging (despite the protestations of my marketing manager who tells me I am breaking every marketing rule in the book by stopping cold for two months).


The BBC at Bigwin Golf Club

The reasons for my sabbatical are threefold:

1. My wife bought me guitar lessons (Father's Day 2012); something I always wanted to try and I have yet to use one lesson. I hope to start these lessons in the summer or at least in the early fall.
2. In addition to writing my blog on a weekly basis, I have been attempting to write a book since September. However, to date, all I have is a proposal for a book publisher should I decide not to self-publish, an introduction and two chapters. Thus, I would like to see if I can get some more traction writing the book (subject to how many golf games I can get in). The book, if it is ever completed, is not on tax, although it is financial in nature. Many of the proposed chapters are based on feedback I have gotten from readers to various blogs I have posted.
3. Since the inception of my blog, I have typically written my blogs at home in my spare time, which has been problematic given I have been very busy at my real job over the last year and a bit. Consequently, I have not been getting enough down time and need a bit of a break. Starting in September, I hope to write many of my blogs during my work week (don't tell my partners this).  

Thus, whether you needed to know or not, those are my reasons for taking a break. Have a good summer and see you in September.

Revised T1135 Foreign Income Verification Form

 

I cannot leave in good conscious without first commenting on the revised  T1135 Foreign Income Verification Form ("T1135"). In the March 2013 Federal Budget, the CRA stated it would be revising the T1135 form to provide more specific information. Well they certainly have. Taxpayer's and their accountants will not be pleased with all the detail required. Here is a link to the new form.

The increased reporting requirements include:

• The name of the specific foreign bank/financial institution holding funds outside Canada
• For each foreign property identified on the T1135, the maximum funds/cost amount for the property during the year and cost amount at the end of the year (the old form only required the cost amount at the end of the year if at anytime in the year you exceeded the threshold) 
• For each foreign property identified on the T1135, the income and capital gain/loss generated (the old form asked for total income or gains from all foreign property in one lump sum)
• Specific country where each foreign property is located (the old form had pre-defined groupings based on each continent for all the property on an aggregate basis)

This reporting is not only more onerous and potentially more costly (higher accounting fees), information such as the maximum funds or cost amount held during the year will often be impractical to determine. There is one important saving grace to these rules. If the income for a foreign property is reported on a T3 or T5, the details do not have to be reported. This will exempt most U.S. or foreign stocks held with Canadian brokerages; but the details for property held outside Canadian institutions will be burdensome.

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.