It’s Personal Tax Time – How to Get on Your Accountant’s Good Side

Many readers of this blog use accountants to prepare their personal income tax returns. You can take three approaches in working with your accountant. You can provide them with:

1. all the detailed information they request
   
   
2. most of the information, without overly exerting yourself
   
   
3. the minimum information, since you pay good fees

From a client perspective, all these approaches are reasonable to some degree. However, as a retired public accountant of 35 or so tax seasons, I suggest you lean towards approach number one, to the greatest extent you can.

I say this for two reasons. The first reason is simply the better organized you are, the more time your accountant can spend dealing with minimizing your taxes. The second reason is that many Canadians invest in mutual funds (T3 slip) and limited partnerships (T5013 slip). Both these investments have March 31st deadlines for issuing the T3’s and T5013’s, so clients often have to wait until late March and early April to receive their slips.

Consequently, your accountant’s workload has likely changed substantially over the last five to seven years, such that 45-60% of the client information comes in after say April 7th. In the good old days, that number was likely only 25-35%.

I am not expecting you to shed too many tears about your accountant’s working conditions given the fees you pay them. I am telling you this because the easier you make it for them to work on your return (rather than chase information), the better it is for you.

So, with the theme of be nice to your accountant, I list below some do's and don'ts for providing your tax season information to your accountant. 

I will start with the things you want to avoid doing.

Tax Season Don'ts

1. Do not hand your accountant all your tax slips in the original envelopes 
   
   
2. Do not send your accountant PDF’s of each tax slip as they arrive. If you prefer to use email or your accountant has a portal (in lieu of paper copies), try to send a first batch of as many initial slips as possible. Then make a list of what you think is missing (such as T3’s, T5013’s, straggler donation slips) and send a second batch all these slips. Once that is done, it is fine to send amended or straggler slips one by one 
   
   
3. Do not provide your prior years tax returns and tax slips to your accountant. All tax programs have prior year information carried forward if required and most accountants have paperless systems of prior years slips if a past tax slip is required for any reason 

Tax Season Do's

1. Provide your accountant any investment, capital gains and foreign reporting information provided by your investment advisor
   
   
2. Have your children download their tuition receipts from their University portal
   
   
3. Ensure your have official donation slips for all your donations. If you only have a confirmation of your payment from the internet, that is not an official receipt and you will need to request an official receipt from the organization. If you want to earn a gold star, summarize the donations for your accountant so they have a total to compare against their total. This is definitely more than expected, but it acts as an excellent check and balance, as I have had many variances over the years and a summary provides a quick way to see if the client’s total was off or the accountants total was off.
     
4. If you made a donation of marketable securities (see this blog for more detail), make a note for your accountant. This is something they will likely pick-up, but it can be missed sometimes as the notation on the donation slip is sometimes small or in a corner somewhere and easy to miss.
   
   
5. For any medical expenses, where possible get one summary receipt, such as for a chiropractor or physio etc. Some pharmacies also provide a yearly summary, so you don’t have to provide 34 individual receipts.  
   
   
6. Still with medical receipts, if you are audited by the CRA, they will want to see a medical receipt that reflects payment. I often received the invoice for medical purchases, but not an invoice reflecting payment. You may need to follow-up with the medical practitioner to request a paid receipt (again, if you have several expenses with the same practitioner, get them to do one summary receipt reflecting the services and reflecting payment for those services)
   
   
7. If you have a line of credit with the bank for investment purposes (especially for professionals to fund their capital entitlement), see if your banker can provide a simple summary letter on the financial institution’s letterhead of the total interest expense for 2022
   
   
8.  If you have rental income, summarize your rental income and expenses for the year. Also provide any invoices for any large repair bills so your accountant can determine whether the expense is currently deductible or must be capitalized.
   
   
9. If you sold your home in 2022, provide your accountant the sale information. Also provide the date you purchased your home and the original cost information (although it may not be needed depending upon the circumstances). The above information must be reported to claim the principal residence exemption, or the exemption may be denied, or a substantial penalty levied.
   
   
10. Let your accountant know if anyone in your family has become a non-resident in the current year.
    
    
11. Review your return before it is filed. You know your affairs better than anyone. Do a quick overview of your return to ensure what you expect to be reported and deducted has been reflected accurately. In most cases everything will check-out, but sometimes things are missed or when reviewing your return, you realize you forgot to inform your accountant about some income or deduction for the year.

The above information will cover off much of your return. Many accountants make this easier by providing a checklist for you to organize your tax information. 

While all this organizing may seem like a lot of work when you are paying someone to prepare your return, you want those dollars spent having your accountant working on minimizing your taxes, not chasing down information.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

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

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

Condensed Tax Season

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

Principal Residence Exemption Rules

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

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

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

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

Penalty

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

• $8,000; and

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

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

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

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

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Confessions of a Tax Accountant -2014- Week 2

This week I finally got rolling and I reviewed several income tax returns. A few issues arose from these reviews which I discuss today.

The first issue is an often overlooked medical expense. The second issue, a matter I have discussed before, is how financial

institutions fail to adjust their realized capital gain/loss reports for flow-through shares and how this can result in significantly understated capital gains. The final issue is the confusion in reporting capital gains from the sale of your mutual fund.

Employee Paid Health Premiums

 

Way down at the bottom of your T4, in box 85, you may find a number. That number is the amount of premiums you paid for your private health service plan. This payment qualifies as a medical expense on line 330 of your return and is very easy to miss. According to this blog, Canadian MoneySaver is the person responsible for box 85.

Your Flow-Through Capital Gain is only Understated by $100,000

In my recent post on The Dynamics of the Investment Advisor/Accountant Relationship, I note that one way for Investment Advisors ("IAs") to lose the accountant as an advocate is to not assist in sorting out their clients flow-through tax shelter information. As I have discussed in the past, the issue is more than an advisory issue, it is a financial institution reporting issue.

Very quickly, if you purchased a flow-through share for $10,000, the Adjusted Cost Base ("ACB") is ground down to zero almost immediately by the initial resource exploration and development expenses you claim. By the end of year 1, your ACB is often nil (the ACB may increase in future years because of income allocations, however, let's assume it stays at zero). In year three or so when the flow-through is converted into a mutual fund, the cost base is nil, even though you originally paid $10,000. Say you sell the mutual fund immediately after converting your flow-through for $4,500. For tax purposes, you have a capital gain of $4,500 since you have a nil cost base. Yet, most financial institutions report the disposition as a capital loss of $5,500 (the $10,000 initial cost less $4,500 proceeds).

I have been told that from a liability perspective, the financial institutions do not want to get into making tax cost base determinations (although, I have seen some of the better IAs and certain investment counsel firms adjust the ACB to the proper amount). I can understand this position; but, I cannot understand why the financial institutions or the IAs do not at least highlight this issue in some way when they print out the realized gain/loss schedule for their clients.

To date, I have had three capital gains reports provided by IAs that were materially wrong because they had the incorrect ACB for flow-through shares. For two of the clients, their actual capital gain was understated by significantly more than $100,000. In summation, these transactions need to be highlighted in some way on capital gain/loss reports.

Mutual Fund Sales - Oops, I thought the gain was on the T3

Do you own mutual funds? If so, you may have to report two capital gains this year. The first capital gain(s) you will have to report will be the capital gain(s) reported on your T3 slip(s) for any mutual funds you still hold at the end of 2013. In addition, if you sold any of your mutual funds in 2013, a second gain, being the capital gain on the disposition of the mutual fund sold must be reported.

I am discussing this issue for two reasons. The first, a client called last week to advise me that after reviewing the capital gains reported on their annual mutual fund statement for 2013, they realized they had missed this information in 2012; so the topic is on the top of my mind. The second reason is preventive. If you have mutual funds, you probably just received your T3 slip in the last couple days, so you may have not yet filed your return. Thus, you have time to review your annual mutual fund statement to check whether you need to report the sale of any funds in 2013.

So let me explain the issue in greater detail. Assume that in 2012 you purchased 1000 units of the BBC Spec Stock Mutual Fund for $7,000 and also purchased 2000 units of the BBC Bond Fund for $8,000. Let’s also assume in the same year you re-invest your distributions to purchase additional units of the BBC funds. So last year you would have received a T3 slip (usually one T3 slip with a supplementary page breaking down the total on a fund by fund basis) from the BBC Mutual Fund reporting interest, dividends and capital gains earned in the year. This income is essentially the distributions you re-invested in the BBC fund.

Many people assume any capital gains they realized on the sale of their mutual fund units are also reflected on these T3’s, however, the T3 slip just reports gains (and other income) the fund itself has earned and distributed in the year, not your proceeds of selling the actual fund.

For example, if in 2012 the BBC Spec Stock Fund owns shares of Rocky Raccoon Mines and during the year the fund sold these shares for a $400,000 gain, your T3 slip for 2012 would have reported your proportionate share of the Rocky Raccoon gain, say $400 if you owned .001% of the fund. This $400 distribution is re-invested in additional Spec Stock BBC units and your adjusted cost base is now $7,400 as of January 1, 2013.

If you sold the Spec fund in 2013 for $8,000, the $600 ($8,000-$7,400) gain will not be reported on a 2013 T3 slip, even though you will receive one for the BBC bond fund you still own. This gain must be reported by you on Schedule 3 of your tax return.

It is very easy to miss the actual sale of your mutual fund units, since this information is often embedded in your annual mutual fund summary. If you own mutual funds and sell a fund during the year, ensure you make a note to yourself to look for the capital gain information on the annual yearly summary and report that gain on your tax return.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

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

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

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

You see, under Subsection 163(1) of the Income Tax Act,  where a taxpayer has failed to report income twice within a four-year period, she/he will be subject to a penalty. The penalty is calculated as 10% of the amount you failed to report the second time. A corresponding provincial penalty is also applied, so the total penalty is 20% of the unreported income. It is important to note that the amount of income that was unreported the first time is not relevant in the calculation. If you failed to report $100 the first time and $10,000 the second time, the penalty will be $2,000, a somewhat ludicrous result considering if the slips were missed in the reverse order the penalty would only be $20.

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

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

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

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

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.

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.