Confessions of a Tax Accountant & The Donation of Services to a Charity

I have pre-written many of my March and April blogs, as my life as a tax chartered accounant will get crazy shortly. Between preparing trust and estate returns which are due March 31st, personal income tax returns due April 30th, and the onslaught of December corporate year-ends, I will be kept very busy. In addition, I always seem to have a client either selling or purchasing a business during tax season, god forbid this should happen in the other ten months of the year.

To add content to my blog and to keep it fresh, I intend to start a weekly blog posting called Confessions of a Tax Accountant. This is not intended to be a whining session by an overworked tax accountant, but hopefully an update on income tax and filing issues that arise as tax season moves forward.

I am not sure where this will go exactly and whether it will work or be interesting, but I will give it a shot. An  issue that arose this week is discussed below.

Donation of Services

I had a client telephone me this week (actually the third client this year) excited that they were going to be issued a large donation receipt for the services that they provided gratis to a charity. Being an accountant, I did my duty and poked a hole in their balloon of inflated donation hopes.

Unfortunately, a charity cannot issue a receipt for services and they should not be leading my clients into thinking they can. The CRA says in regard to the gift of services  “at law, a gift is a voluntary transfer of property without consideration. Contributions of services (for example, time, skills, and effort) are not property. Therefore, they do not qualify as gifts for the purpose of issuing official donation receipts."

My clients cannot fathom the CRA’s position. They tell me their clients/customers would have paid significant sums for these services that they have provided for free. In a way I understand their frustrations, however, the valuation of services is such a nefarious concept that if you look at this objectively, it would create a valuation nightmare for the CRA to allow such; that is why the CRA requires valuable property such as cash or goods (although the donation of goods has its own valuation issues) before a donation receipt can be issued. As an aside, even if the CRA provided for issuing recipts for services, they would then consider the provider of those services to have earned notional income for those services resulting in a net of zero.

Where a charity pays a service provider and the service provider then chooses to donate the money back, the charity can issue a receipt for the monetary donation. However this also results in a net of zero to the service provider, ie: income reported equal to a donation credit.

[Blogers Note: In my Confessions of a Tax Accountant blogs, I will discuss real income tax issues that arise, however, I may embellish or slightly change the 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.

Personal Income Tax Filing Delays-Late and Amended T-slips

As an accountant on the personal income tax firing line, I have seen an enormous shift in the timing of when personal income tax returns are filed in Canada. In the "good old days", the timing of the filing of income tax returns was determined by personality type. People who were early birds and wanted to file their returns to get their refunds as soon as possible or to fulfil their compliance requirement came in early. Many others provided their returns between the second week of March and the first two weeks of April and finally, individuals with the personality type that are Christmas shopping on the 24th, brought their returns to us in mid to late April. In the past, this was great for accountants as these groups split the returns down the middle or were 60/40 such that the workload was spread out over March and April. Clients got better service since accountants and their staffs were not overwhelmed and there was time to properly review the returns and provide planning advice.

However, over the last ten to fifteen years, as Canadians have become more sophisticated and started purchasing mutual funds, flow-through investments and certain other investments, the filing landscape has changed drastically. Since T3 forms for mutual funds and the T5013 forms for limited partnerships do not generally have to be issued until the end of March, many clients, even the early birds, cannot file their returns early. This problem is exacerbated as the penalty for missing the filing deadlines are relatively minor and not a deterrent to the filing corporations, trusts or partnerships. Also there are no penalties for filing amended T3s, T5013s etc. The CRA appears to condone the multiple amending of returns and forms by these trusts and partnerships which are often amended in the last week or two of April.

Whether you engage an accountant or not, this issue still affects you. You may have all your slips ready to file March 1st, but you must wait for that one final slip possibly until the end of March or even later, delaying your refund. If you are waiting for one slip or even two and the quantum is not large, you may consider filing early and then filing a T1 Adjustment when you receive the slips, but most people do not want the hassle of doing such.

In addition, many T3 trust returns, for family trusts often have a March 31st filing due date (the return is due within 90 days of the taxation year often December 31st). Since the deadline for most T3 and T5013 forms is also March 31st and many of these slips have not yet been received, the filing of these returns can be problematic. Thus, accountants are forced to file returns using the information on hand at March 31st and then amend the returns when the tax slips are eventually received.

With clients often waiting for several tax slips, the filing ratio in my practice has changed such that now approximately 1/3 of returns are filed in March and 2/3 are filed in April. From an accountant’s perspective, the last two weeks of April are insane and not conducive to preparing tax returns. In addition, we end up filing many T1 Adjustment forms for the late or amended slips and the CRA wastes resources administering all these amendments. It is interesting to note that the CRA is aware of this issue and actually addressed it in the 2007 Federal Budget saying; it would review and streamline the T3 slip process, but nothing seems to have changed.

In my opinion, the CRA should consider one of the following changes:

1. A February 15^th deadline for T5s and a March 15^th deadline for T3s and T5013s etc.
2. February 28^th deadline for trusts and partnerships that don’t have significant investment income (say 5% or less). Any investment income would be accrued where it was less then 5% of the total revenue.
3. A March 15th deadline for T3s & T5013s where the units are held by investors (ie: income trusts, flow through partnerships, mutual funds etc.) and a March 31st deadline for family trusts.
4. Or probably, most practically, significant penalties to deter the late filing of forms or penalties where amended forms and returns are done on a consistent basis.

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.

Retire Happy Blog-"Big Brother (Canada Revenue Agency) is Watching"

Thanks to Jim Yih of the Retire Happy Blog for publishing my guest blog “Big Brother (Canada Revenue Agency) is Watching” on how George Orwell would even be shocked at how much information the world's taxation authorities are requesting from us. 

Jim is a well known professional financial speaker, best selling author, syndicated columnist and financial expert. However, what has drawn me to his blogs is that he offers sound practical advice. His comments and suggestions can be translated into the everyday lives of his readers.

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 Blunt Bean Counter noted in The Globe & Mail - Staggered Deadlines for Tax Slips

Thanks to Dianne Nice for referencing me today in her column in the Globe and Mail's Globe Investor section, on how the February 28th and March 31st staggered deadlines for tax slips can cause havoc for filing returns.

Dianne, who is the personal finance web editor, writes an insightful weekly tips column on various personal finance issues, which are broken down into actionable tips. She is also one of the contributors to Home Cents which provides expert tips on how to make and save money.

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 Blunt Bean Counter- He Shoots, he …..????

As I noted a couple weeks ago in my blog, I was one of the Prize B winners of the Mr. Sub Shootout . The Prize B package entitled me to take to the ice at the Air Canada Centre and to take two penalty shots on either of Grant Fuhr, Sami Jo Small, Curtis Joseph or Billy Smith.

As this is the first year I have not played hockey since I was around six years old, I tuned up in my garage last week; not exactly simulated conditions shooting at your summer tires, although once I hit the Air Canada surface, my skating was surprisingly strong considering the layoff.

This week I received an email that I would be shooting at noon on Sunday. I was allowed two guests, so I brought along my daughter and my good buddy Dave who is a hockey fanatic. Upon arrival, you have an autograph session and pictures, then get a tour of the Raptors locker room.

I took to the ice in my Bobby Orr throwback jersey (the best hockey player ever) and took a few practice laps around the Air Canada Centre (unfortunately, I did not feel the presence of Leaf greats of the past; I think they have been hanging out at Maple Leaf Gardens for 44 years), but I digress.

I was told that I would be shooting on Billy Smith. I had already decided on my first attempt I would go with a wrist shot or basic deke and leave my fancy between my legs deke for the second shot.

I think Billy missed the memo to take it easy, as his competitive nature took over, as he stopped the first 8 or so shooters and poked checked many, including the little kids. His stick is so quick even after all these years.

On my first shot I started at centre, built up speed and decided to go for a deke, I went right, left and back right and out came Billy’s quick stick to poke away my first attempt. Okay, so my plan was working, I had Billy thinking I did not have many moves in my tool box, little did he know what was to come.

I said a little prayer hoping my brain and body would work as one this one last time and started in on net. About the faceoff circle I let the puck drop between my skates and I then kicked it with the inside of my right skate to the outside of my left skate. I was relieved to see I had actually accomplished my task, until I looked up and saw Billy charging out of the net at me. I somehow squirmed away to the right and put the puck in the open net. As I was skating by, Billy whispered that if I tried that in a real game, he would have knocked me flat when I kicked the puck up to my stick. He was pretty easygoing about everything, considering I still don't think he likes to be scored on.

Following the shoot out we each got two shifts in a shinny game and I had a break away on Sami Jo Small who stopped me. As the puck went up ice, I told her with a wink she was lucky my mind and hands did not quite work like they once did, she smiled and smirked (the smirk meaning I would have still not scored on her in my prime).

Anyways, lots of fun for all, name on the scoreboard and a memorable experience.

Pictures and video will follow in a week or so for those who want to see The Blunt Bean Counter in action.

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.

Creditor Proofing Corporate Funds and Do You Eat to Live or Live to Eat?

Creditor Proofing Corporate Funds

Most owner-managers of private corporations are concerned about creditors potentially gaining access to their corporation’s cash and investments through real or frivolous lawsuits. The simplest method to protect surplus corporate funds is through the use of a holding company. 

The Income Tax Act permits an owner-manager to transfer the shares of their operating company (“Opco”) to a new holding company (“Holdco”) without incurring any tax.  Following this type of transfer, the owner-manager would own the shares of Holdco, which, in turn, would own the shares of Opco.  With that type of ownership structure in place, Opco and Holdco would be what is known as connected corporations. 

When corporations are connected, they can typically pay their retained earnings (excess cash and other assets net of liabilities) of the corporation , as a dividend from Opco to Holdco on a tax-free basis.  This has the effect of removing excess cash and other assets from Opco so that it would no longer be susceptible to future creditors’ claims. This can be repeated in the future as Opco accumulates additional retained earnings.

If Opco requires ongoing cash and working capital, the funds received by Holdco could be loaned back to Opco on a secured basis provided a General Security Agreement (“GSA”) is registered by a lawyer. It is important to note the dividend first paid by Opco must be physically paid by way of a cash or other asset transfer and then physically loaned back to Opco by Holdco to ensure that the GSA is valid. 

Opco’s banker should always be advised in advance that Opco is undertaking a creditor proofing transaction.  Where a bank loan or other debt is present, the GSA will secure the loan but Holdco generally would still rank behind the bank or other secured creditors as far as payment is concerned.

The structure noted above is simple and effective. However, where the owner-manager or other family members have access to the $750,000 capital gains exemption and may potentially sell shares of the company in the future, this type of creditor proofing transaction may not be appropriate and some variation may be required. Depending upon your family and personal financial situation, it may be possible to creditor proof Opco, maintain potential access to the capital gains exemption and provide a means to income split with family members in one fell swoop by utilizing a “freeze” transaction.

This “freeze” transaction will be discussed in my blog in two weeks.

Do You Eat to Live or Live to Eat 

I love good restaurants, but I also love burger shacks, Middle Eastern shawarma and falafel restaurants and sausages from street vendors.

I list among my favorite things to eat steaks, corned beef and hot dogs in the meat area, shrimp, crab, sushi and lobster in the fish area, fries and potato chips in the fried area and ice cream and crème brulee in the dessert arena.

The above is a who’s who of the worst foods to eat cholesterol-wise (some say shellfish are not that bad for cholesterol) so in retrospect, I guess I shouldn’t have been surprised when my latest medical revealed my cholesterol had gone up. Poor food choices in conjunction with a lack of exercise due to a couple of back to back hockey injuries, finally took its toll. My wife, a very healthy eater promptly brought me into the fold and suddenly things I never heard of, or conceived of eating, like bran buds, flax seed and quiona, replaced donuts and fries. I now realize how much I am a live-to-eat person.

On the positive side, I have discovered that I actually like some foods that I would not normally look at, but in general my current diet is by no means a culinary delight. Hopefully I can get my cholesterol down and I can go back to a more balanced diet while eating smarter, but boy do I miss my bad foods.

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.

CRA Audit- Will I Be Selected?

I am often asked how the Canada Revenue Agency (“CRA”) selects its audit victims; oops, I meant to say taxpayers subject to audit. Through experience I know certain taxpayers, certain claims and certain industries seem to trigger audits. With that in mind, I will list below what I have seen and how I believe the CRA selects certain individuals and businesses for audit.

Reasons for Individuals and Corporations

I would suggest there is nothing worse than a scorned lover, a business partner you have had a falling out with or a dismissed employee to trigger a CRA audit. These individuals know your little secrets; a cash deal here, an offshore account there and a conference you expensed that was really a vacation. These people are also vindictive and in some cases, they make statements and claims that are not factual in nature; however, the claims are enough to bring the CRA to your door.

CRA also loves net worth audits. These are audits undertaken because you live in a 3,000 square foot home, have a Porsche and kids in private school, and yet show minimal income on your tax return.  Typically CRA either stumbles upon these situations, or information from one of the individuals noted in the preceding paragraph provides a lead.

Reasons Specific to Individuals

We see far more desk audits (information requests in regard to certain deductions claimed) than full blown audits for individuals. You can expect an inquiry if you claim any of the following:

• a significant interest expense,
• an allowable business investment loss (usually if you held shares in a bankrupt private Canadian company),
• tuition from a university outside Canada (typically the child and parent are tied together as most children transfer $5,000 of their tuition claim to their parents),
• a child care claim for a nanny; even if you have filed a T4 for the nanny with CRA. Why CRA cannot crosscheck their records is baffling and befuddling.

In all the above cases you are just providing back-up information, these are not audits.

In past years individuals who purchased any tax shelter other than an oil & gas or mineral flow through have been audited. However, in most cases the CRA is auditing the tax shelter itself and the individual investors just get reassessed personally.

Full blown audits seem to occur with regularity in regard to individuals who earn commission income or self employment income and claim expenses against that income. In those cases, CRA gravitates to auto expense claims, requesting logs books they know one in 100 people actually keep, and advertising and promotion expenses they consider personal in nature.

Reasons Specific to Corporations

Corporations seem to be selected for three distinct reasons.

They carry on a business that is CRA’s flavour of the year; some prior flavours have been pharmacies, contractors and the real estate industry and any other industry CRA feels is a “cash is king” industry.

Corporations file General Indexed Financial Information known as GIFI. This information provides a comparative year to year summary of income and expenses. It is suspected by many accountants that CRA uses this information to review year to year expense and income variances of the filing corporation and to also compare corporations within a similar industry sector to identify those outside the standard ratios, but we don't know that for certain.

The final reason is that it is just your turn. I have no knowledge of this, but it seems like CRA just runs down a list and if you don’t get caught in regard to #1 or #2, your turn just eventually comes up.

In all cases it is imperative you keep your source documents to provide to the auditor; CRA more then ever wants source documents. It is also vitally important if you and not your accountant are meeting with the auditor, that you try and keep your cool. In the end, the auditor is just doing his or her job and if you treat them badly, you are not doing yourself any favours.

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.