Confessions of a Tax Season Accountant — 2019 Edition

For the first four years of this blog, I wrote a series titled “Confessions of a Tax Accountant” during income tax season. Those posts would discuss interesting or contentious income tax and filing issues that arose as I prepared my clients’ tax returns. (One of my favourite of that series was this post that also included an ode to the Maple Leafs. I’ve since realized that I should stick to financial topics and leave the odes to professional writers. However, once a Leaf fan, always a Leaf fan. I wish them good luck with the Big Bad Bruins as they start another pursuit of the Cup on Thursday. Go Leafs Go.)

Today, I go old school and bring back the tradition with some new confessions to cleanse my tax soul.

I have only received the tax information for around 53% of my clients as of April 6th; as the remainder are waiting for their final T3 and T5013 slips to arrive and Easter is later this year. But I’ve still accumulated enough confessions to get off my chest. (By the way, the fact the T5013 essentially only has numerical boxes with no written descriptions continues to drive both clients and accountants mad.)

TOSI

This year marks the first year of implementation of the controversial tax on split income (“TOSI”) rules. If you have been a reader of this blog, you will know all about this issue. If you are a new reader or need a refresher, you can read this BDO publication on income splitting.

In general, TOSI has not been a huge issue for my clients this year (tax return wise) when considering their children, because many of them already stopped using their family trusts or private corporations to pay dividends to their children in 2018. This is because of the punitive TOSI rules for children (typically between age 18-24), which became effective January 1, 2018.

However, spouses are another story. Where spouses have received dividends, it must be determined whether the dividend is subject to TOSI or meets one of the exemptions. There is an excluded business exception for any family member who is at least 18 years of age and worked on average at least 20 hours a week in the business in the current year, during the part of the year in which the business operates. This exclusion will also be met if in a total of five previous taxation years of the individual the 20-hours-per-week test has been satisfied. Note that this is true even if the five years occurred at any time in the past. The years do not need to be in succession.

Many clients are still trying to determine whether their spouse's met/meet this test, and we cannot file their returns until that final determination is made.

U.S. capital gains reports

We continue to receive realized capital gains reports for clients for their U.S. brokerage accounts in U.S. dollars only. These reports are deceiving, as they have not converted the original purchase and sale into the Canadian-dollar equivalent at the time of the original purchase and at the sale dates. Thus, by missing the foreign exchange component, the reported gain is often way out of whack.

Donations and medical expenses

Several clients provide their donations and medical receipts in their own packages (i.e., each spouse provides me their own donations and medical receipts). I am not sure if this is done for simplicity or whether they do not realize that in almost all cases, we claim the donations and medical credits on only one spouse’s return to maximize the claim.

Missing T2202A for students

As per the recent blog post “The Top Tax Tips for Students,” students need to print out their T2202A tuition receipt from their student portal. I would say for 80% of the returns for which there is a student in the family, we have not received the receipt and I must request it be printed out. So, students and parents: ensure this form is retrieved.

RRSP withholdings

I had a couple of clients withdraw money from their RRSP this year for income smoothing purposes. The problem is the statutory withholding tax for RRSPs is only 10% for withdrawals up to $5,000, only 20% for withdrawals between $5,000 and $15,000 and 30% for withdrawals over $15,000. These withholding rates are often less than the actual marginal tax rate of the client and result in a surprise tax liability. For example, if you took out $15,000, the withholding rate is only 20%, but the actual tax rate when you file your return could be 42% — thus you would have a 22% shortfall.

That’s it for my confessions. I hope your tax return results in a refund or at least less tax than you anticipated.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

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Suggestions and Strategies to Facilitate the Tax Preparation Process for You and Your Accountant

The Blunt Bean Counter

Last year I wrote a tongue-in-cheek post “The Top Ten Accountant Pet Peeves about Personal Income Tax Season”. One of my long-time readers, who uses the pseudonym Pursuit 99, made the following comment on that blog post: “Thanks for the heads up on what not to do. It really is helpful. Now, how about a list of ten specific solutions or strategies that really benefit the process of personal tax completion for both you and the client.”

Pursuit 99, your wish is my command. Today, I will provide an accountants dream list of actions, forms and summaries that will benefit the tax preparation process for both the client and his/her accountant. Please excuse the overlap between todays post and the Pet Peeves post.

The list below requires the client to do extensive summarizing and organizing. I have a feeling some people after reading the list are going to be saying to themselves, “Pursuit 99 said what can be done to benefit the client and their accountant, not just their accountant.” However, there is an art to preparing a tax return as certain items require subjective decisions. You want your accountant to be spending his/her time making these decisions, not adding up your telephone bills. 

How to Become your Accountants Favourite Client

1. Provide your accountant a summary page of what forms and slips you have included in your tax package. You would be surprised how often there are disagreements as to what was received from a client. This summary keeps both sides accountable for information flow and retention.

2. Do not send a shoe box. Many accountants will not accept shoebox clients. I personally would be concerned about any accountant that does, since they are not spending time on what is important. In my opinion, any accountant who lets their clients bring in a shoe box every year is clearly not concerned with ensuring an efficient tax preparation process.

3. Open any envelope containing an income tax slip at home and do not send your accountant unopened envelopes. Do you really want to be paying your accountant to open envelopes? Also, if you have a cranky accountant like me, you have started off on the wrong foot.

4. Don’t send junk. Separate real tax slips from things like RRSP & TFSA application forms, monthly investment account statements for RRSP and RRIFs, last year's Efile form and last years actual return. If you are unsure, send the form, but don't send everything just because you are too lazy to sort through your tax papers. By the way, your accountant does not need a copy of last year's return, it is on their computer.

5. Advise your accountant upfront about any changes in your personal situation. The birth of children, address change, marital changes, extramarital affairs (just kidding, although this may explain why you have less investment income this year).

6. Summarize and total donation and medical expenses. Your accountant will review all donations slips to ensure they are deductible and all medical expenses to ensure they qualify and are deductible and have not been double counted (when there is an insurance plan in place). However, having a summarized total lets your accountant reconcile their totals with yours quickly.

7. Summarize capital gains/losses (if not provided by your financial advisor). This is a huge issue. Accountants do not have the time to figure out your gains and losses on 50 trades in the middle of tax season, let alone try and figure out the adjusted cost base for stocks you owned 10 years ago when you were not even their client. You either need to do this yourself, or engage your accountant to do this throughout the year so all your capital gains/losses are summarized before March. This is not to say you may not have specific questions regarding a cost base determination to discuss with your accountant. However, if you don't do the majority of the work, you will be charged an arm and a leg by your accountant for undertaking this task during tax season.

8. Make a copy of your 2011 T776 rental schedule and write the comparable 2012 numbers, excluding depreciation, beside the 2011 totals (or summarize your rental expenses on an excel spreadsheet). By undertaking this task, you will note any obvious discrepancies between the two years, which you should review before providing the information to your accountant. This exercise benefits your tax return process as instead of adding up rental expenses, your accountant can now concentrate on contentious issues such as whether a large rental repair is an expense or capital addition.

9. The same holds true for the T2125 or T2032 business and self-employment statements. Provide your accountant a summary of the income and expenses and a list of any questions you had in putting the numbers together. Your accountant can then spend time reviewing the numbers and asking questions rather than adding up a bunch of receipts.

10. If you do not keep an automobile log and are claiming car expenses for employment or business, at minimum, provide your accountant with your odometer reading at January 1st and December 31st. This quantifies your mileage driven during the year and will assist in the discussion as to what percentage of your automobile expenses were deductible in the year.

11. If you are claiming employment expenses, ensure you have obtained the T2200 Form from your employer and summarize your employment expenses for the year. The T2200 allows your accountant to review what expenses your employer says you incurred or were required to incur.

12. If you purchased a rental property during the year, provide your accountant with the purchase and sale agreement, statement of adjustments, legal fees and appraisal fees. This will save significant time on your file and ensure you get full benefit for all the initial costs incurred.

13. If your children are in University or College, ensure they download their T2202A tuition forms, since students can transfer up to $5,000 of tuition credits to their parents, but your accountant cannot make that determination without the T2202A form and your child's tax slips.

14. Don’t just tell your accountant your kids exceed the minimum $500 fitness amount. Obtain invoices and statements from the sports club, dance studio, etc. There is a good chance the CRA will request these forms to substantiate your claim, so ensure you have the correct numbers from the start.

15. If you are claiming child care, provide a copy of your Nanny’s T4. If you use daycare, provide a receipt that reflects payment for the year.

The above is a substantial list that requires significant time and effort on your behalf. However, if you provide most of these items, your fee should be lower and your accountant will have more time to spend minimizing your tax liability.

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.

Tax Tweets of the Day for the Week Ending February 1, 2013

My twitter tax tips for this week are listed below. Nothing too fancy there, I like next week’s better. However, I’ve added a couple quick comments to the tips below.

Tips for Week of January 26- February 1,2013

University/College students must print their T2202a tuition forms issued by their school to claim or transfer #tuition credits. #blunttaxtip

Note: University students are notorious for not printing out their T2202a tuition forms and holding up the filing of their parent’s tax returns. These forms are sent by the Universities and Colleges to their student’s portals typically in the next week or two. Please remind, or in my case, harass your kids to print out the form and email it to you.

Ensure your children’s activity receipts are marked paid in full to claim fitness/arts credits. #blunttaxtip

Obtain capital loss, HBP, #RRSP & #TFSA limit info from your online CRA acct. or 2011 tax assessment. #blunttaxtip

Note: It is very important to ensure you have updated carry forward information for your capital losses. You want to ensure you claim the maximum amount of capital losses carryforward against any current year gains.

If you have self-employment or rental income, summarize the income & #expenses now, so you’re not rushed/miss expenses. #blunttaxtip

If you moved to a new work location in 2012 >40km away, gather & summarize your receipts to support the claim. #blunttaxtip http://bit.ly/XEZqmQ

Note: If you moved to a new job this year, it is very important to gather all your receipts for any expenses you incurred and summarize as required by the CRA. See the link above and the form T1-M to understand what expenses are eligible and how the CRA wants these expenses aggregated.

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.

Information Requests from the CRA that make you go Hmm

Every year after income tax season, I can count on several clients calling to inform me they have received an information request from the Canada Revenue Agency (“CRA”). One of the most common requests is a request for back-up information in regard to child care expense claims made for nanny's employed by my clients.

The CRA states the following in the information request: “to support your claim, please provide the following information: Either receipts, cancelled cheques or your Business Number (if you have issued a T4 slip to a caregiver)”.

Each time a client who has employed a nanny receives such a request, I shake my head. That is because where my client has hired and paid a nanny for childcare services, they are required by law to issue the nanny a T4 and when my clients file their income tax returns and make their childcare claims, they must provide the nanny’s name and SIN# on the childcare Form T778.

One would think that rather than wasting taxpayer’s time and CRA resources, the CRA would simply just punch the nanny's name and SIN# into their computers to cross-check that the nanny has reported the income provided on their T4 on their income tax return. This would seemingly confirm (a) the taxpayer actually paid the childcare costs and (b) the nanny has reported the income.

I have asked CRA agents numerous times why the CRA undertakes the above process and does not simply cross-check the child care claim instead of wasting my client’s time and the CRA’s resources. All I get is I agree with you, I don’t know why.

Maybe there is a more nefarious reason for the information request; however, no one has yet been able to provide such a reason or maybe they are not willing to do so.

Another information request my clients constantly receive is a request to provide the tuition receipt form T2202a for Canadian students and the T11A form for foreign students, typically, students attending University in the United States.

Where a client has e-filed, I understand the request for support of the tuition claim.

However, for those few clients who still prefer to paper file and the numerous Canadians that still paper file, this request is another head scratcher (especially since it has been a common request for years, even before e-filing became the norm). Why these information requests make you go hmm is that the CRA specifically states that you should only complete schedule 11 and not attach the T2202a form to your income tax return. You would think that if the CRA is going to consistently ask for the form, they would just make it a requirement to attach the form to save both taxpayer’s and the CRA’s time and resources.

 I could go on, but I will let any reader who wishes to pipe in to add to this list of things the CRA does that makes you go hmm.

Financial Blogger Michael James recently set forth his views on CRA Processing Reviews in this blog post.

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-Week 7-Late T3 slips & T2202A slips

Those Straggler T3 slips

This week, a few clients for whom we had already filed income tax returns, received additional T3 slips in the mail.  The receipt of these forms will necessitate the preparation of T1 Adjustment requests in May to account for these missed slips. This is a huge waste of time and energy for our firm and for the Canada Revenue Agency to process these forms, and frustrates our clients to no end.

The receipt of these additional T3 forms raises two questions: the first is “why do clients not realize they have additional slips outstanding”, and the second is, “do they have too many accounts to start with"?

In regards to question one, we find the confusion typically relates to income trusts. If a client has one or two income trusts, it is not very hard to track which T3s are outstanding. But many of our clients have multiple income trust units and it becomes extremely difficult to track what has been received.

The major investment firms attempt to do their part in tracking T3 slips, as they typically include a listing of income trusts for which information is still outstanding. However, as this listing arrives with several pages of administrative papers, many clients do not even keep the list. Even when you have this list, the T3s seem to come in batches, so one T3 may have three income trusts reported, but not include four others. Then you receive another T3 and it includes only one income trust and finally you receive a final T3 that has the final three income trusts reported. In the end, it is very hard for clients, the client’s investment advisors and their accountants to track whether all the income trusts have been accounted for in the tax return. This problem thankfully, should subside next year as many income trusts have converted to corporations.

In respect to the second question, many clients just have too many accounts and deal with too many institutions and/or advisors. This leads to dysfunctional investing and portfolio management. This issue will be a topic for a future blog.

Cyberspace and T2202A tax slips

This week, much like every week prior, I had several clients provide their university/college-aged child’s income tax materials without their T2202A tuition form. In the “old days” this form was mailed, however, these days, the institutions do not mail the receipt, but rather place them on their website and thus the form must be accessed by the student. I would suggest the percentage of students who ever notice or pay attention to this comes in around 10%. Thus, without the parent or accountant requesting this information, it is forgotten and potentially missed as a credit.

The tuition information is important for two reasons. The first reason is that in most cases, the child can transfer up to $5,000 of the tuition, education amount and textbook amount to their parents or grandparents (federally) if these amounts are not required to reduce the child’s taxable income. The second reason is that excess balances of these credits that are not transferred or utilized can be carried forward by the student to be used once they become taxable (i.e. commence full-time employment).

So for example, assume a typical student who pays $6,000 in tuition and attends school for eight months full time. This student will have tuition credits of $9,720 ($6,000 tuition plus $3,720 ($400 +$65 a month x 8), for full time education and text book credits respectively. Assuming $5,000 of this credit is transferred to their parent or grandparent, the student has a tuition credit carryover of $4,720 ($9,720-$5,000). There are  also provincial credits, but they pretty much mirror the federal credit. It should be noted a student can make approximately $11,000 of employment income before the tuition credit is impacted.

Thus, after four years, the tuition credit carryforward  could approach $20,000. When your child files their first income tax return reporting full time employment income, they will potentially have a credit worth approximately $4,000 (being $20,000 tuition carryover times 15% federal credit plus 5.05% Ontario tax credit).

If your son or daughter is in a specialty business school or similar professional school and pays say $20,000 a year in tuition, the federal tuition credit carryover could potentially be $18,720 ($23,720 less $5,000). This size credit could potentially lead to a refund of almost $19,000 in their first year or two of full-time employment.

[Bloggers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, but embellish or slightly change facts to protect the innocent, as the saying goes.]

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.