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Tax Season Lessons

The tax season is, for the most part, finished. Or is it? The deadline for self-employed individuals (non-corporate) is June 16th this year. However, any income tax due was payable by April 30th. Those with refunds can file after April 30th but be aware, even if you show a refund now, any reassessments that change that to a balance due would result in penalties for late-filed returns. Even if your return is filed, you should be planning for 2014.

Each year, we can think back over the approximately one thousand personal returns that we do at Bluenose Accounting and situations come to mind that we found interesting or that we can learn from for future years. The one that sticks out the most is how many returns CRA is selecting to review before mailing the refund cheque. CRA seems to be prioritizing areas such as medical expenses, moving claims and dependant claims. Other areas with significant tax implications, such as employment expenses, seem to garner very little attention. We noted some interesting issues and opportunities and that we would like to share with our clients.

Some taxpayers have parents that live with them and there are tax savings for this by claiming the caregiver credit. Elderly parents might also qualify for the disability credit. There are many credits based on claiming dependants and each family situation presents opportunities and must be addressed on a case-by-case basis.

Many students who receive a tuition certificate (T2202) but did not need the credit often simply hand the receipt over to their parents. This represents a missed tax planning opportunity. The correct way to achieve maximum tax savings is for the student to first claim the tuition required to reduce their tax to $Nil on their return and then transfer the maximum allowable amount to their parent. Any unused amount is then carried forward for the student to use in future years. By not entering the tuition on the student’s return first, the carry forward is lost.

We also see situations where spouses file returns with separate accountants or where one spouse does their own return. This again leads to missed tax saving opportunities. While every taxpayer  files a separate return in Canada, processing the returns together at the same time allows for optimization of credits. Pension income splitting is the best example but others include medical expense and donation claims and even the proper splitting of income earned from joint accounts. We recommend using the same accountant as the savings often exceed the cost for the second return.

Many taxpayers are not aware that Management fees and Interest on money borrowed to buy registered account investments, such as RRSPs and TFSAs, are not deductible. The statements that support such claims are often vague and may even advise to retain for income tax purposes. In fact, there are specific guidelines that determine the deductibility of interest and, if not properly adhered to, can result in a denial of deduction. The taxation of investment income and capital gains is a further complexity that trips up some tax payers.

If you are required to pay for expenses on behalf of an employer and that employer is registered for HST, you might be entitled to an HST rebate on your personal return. The principle is that if the employer is not claiming the HST, you as an agent for the employer can make the claim for HST paid on eligible expenses. You require the HST number of the employer in order to qualify and that employer must certify that they are not claiming HST on any reimbursements or allowances they paid to you.

Medical claims are usually reduced by 3% of the claimant’s net income for that taxation year. This differs though for medical claims made for dependants where the claim is reduced by 3% of the dependant’s net income rather than the claimant’s.

One often thinks that they have done enough returns such that they have “Seen It All”. This always ends up being false as we see new and novel situations each year. We don’t always have the immediate answer but a little detective work usually finds the appropriate response. I would like to that the tax team of Terry, Rong and Keir for their hard work making this one of the smoothest tax seasons ever. Here’s to another great tax season next year. Feel free to contact us as you plan for 2014.

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