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What Deductions Can Salaried Employees Claim?

Because employers are generally required to pay for the premises, assets and supplies used up by their employees in performing their duties, the employees themselves have few out-of-pocket costs to claim on the tax return. In some cases, the employee will have expenditures, but to claim them, very specific procedures must be followed.

For example, the employer, must verify in writing on Form T2200, Declaration of Conditions of Employment, that no expense reimbursement was provided to the employee and that the out-of-pocket payments were required as a condition of employment. Partial reimbursements must be declared before expenses are claimable.

Provided that step is met, examples of deductible expenses include supplies used up directly in the work (stationery, maps, etc.), salaries paid to an assistant (including spouses or children if Fair Market Value (FMV) is actually paid for work actually performed) and office rent or certain home office expenses. Form T777 Statement of Employment Expenses must be completed.

Certain specific profiles of employees may have special types of expenses, specific to their work, which can be claimed. For example, employed artists are allowed to claim the cost of supplies used up in their employment to a maximum of 20% of net income or $1,000, while and long distance truck drivers may claim the cost of board and lodging according to specific rules while en route – up to 80% of costs in most cases.

Commissioned salespeople may have promotions and entertainment costs as well as travel, auto or home office expenses.

In addition, certain tradespersons may claim the cost of tools purchased (in excess of a threshold amount) if required by their employer for use in their employment ($500 maximum claim). Loggers may claim certain power saw costs.

Employed teachers can claim a new refundable tax credit for the first time in 2016: the Teacher and Early Childhood Educator School Supply Tax Credit is worth a maximum of $150 (15% of $1000) and can include consumable items such as construction paper, art and science supplies, stationary and pens or pencils, containers, posters, games, puzzles, books, software and so on.

For more guidance on the deductible expenses of employees, consult a DFA-Tax Services Specialist™.


Pre-Budget Analysis: Finance Canada Priorities

A Federal budget date is expected soon after Prime Minister Trudeau and Finance Minister Morneau return from this week’s meetings with the new U.S. administration. Two important reports have been issued recently to provide insight into some of the thinking about risks and responses in our financial world: Finance Canada’s 2016-2017 Report on Plans and Priorities and the Bank of Canada’s January 18, 2017 Monetary Policy Report. Taken together, they provide a good crystal ball on the economic matters that may shape some of the government’s thinking as it delivers its second budget this year.

The Finance Department’s Report reflects on the recent stalling of growth in the Canadian economy and puts the blame largely on two factors: crude oil pricing and what it calls the “overall week and fragile global economic situation” in which we have lived and worked since 2014.

At the time this report was produced, Finance Canada particularly has its eye on the weakened economies in Europe, the politically-charged Middle East and slowing growth common to most other countries around the world.

Emerging markets, in particular, the report notes, will be impacted by the “normalization” of U. S. monetary policy. To that end it has outlined its top three risks meeting its priorities and it will be interesting to see if they come up in the US-Canada meetings and the budget:

  1. Strategic planning and policy recommendations will continue to be difficult. The uncertainty and volatility in the global economy will challenge the Department’s ability to provide accurate strategic advice and policy recommendations. It plans to manage those risks by monitoring global indicators, conducting private sector surveys of the Canadian economic outlook and meeting regularly with private sector economists.
  2. Challenges to the integrity and reputation of the Canadian financial system will require infrastructure and resources. This challenge is to be met by ongoing specialized staff training initiatives, monitoring of events and the need to develop new initiatives in response.
  3. Security. This is an ongoing issue for government. The finance department plans to collaborate with Shared Services Canada to implement new departmental approaches to increased security for networks, desktops and their applications.

More recently, however, the Bank of Canada is monitoring five risks that have evolved since October, 2016:

  1. Stronger real GDP growth in the U. S.
  2. The notable shift towards protectionist global trade policies
  3. Higher commodity prices
  4. Sluggish business investment in Canada
  5. Weaker household spending due to a rise in savings rates and a decline in national housing resale activity all the while that household debt continues to rise
  6. Higher global long-term interest rates

At the end of Budget Day, what’s important to taxpayers and their advisors is how Finance Canada will focus its priorities on changes to the tax system. Here the Finance Department’s Report notes its priorities will include the continued advice and analysis on ways to improve the tax system in four key ways: through fairness, neutrality, efficiency and simplicity. Expect the upcoming budget to take aim at “poorly targeted” tax expenditures and “inefficient measures” that erode the tax base.

Finance Canada, which is a department established in 1867 – 150 years ago – plays a critical role in executing on its mandate: helping government “develop and implement strong and sustainable economic, fiscal, tax, social, security, international and financial sector policies and programs. It plays an important central agency role, working with other departments to ensure that the government’s agenda is carried out and that ministers are supported with high-quality analysis and advice.”

Specifically, the report itemizes the Finance Department’s top seven responsibilities:

  1. Preparing the federal Budget and the fall Update of Economic and Fiscal Projections;
  2. Preparing the Annual Financial Report of the Government of Canada and, in cooperation with the Treasury Board of Canada Secretariat and the Receiver General for Canada, the Public Accounts of Canada;
  3. Developing tax and tariff policy and legislation;
  4. Managing federal borrowing on financial markets;
  5. Designing and administering major transfers of federal funds to the provinces and territories;
  6. Developing financial sector policy and legislation; and
  7. Representing Canada in various international financial institutions and organizations.

In an increasingly complex world, this is a tall order. The next crystal ball to the financial future is just around the corner. We’ll look forward to reporting on the Federal Budget measures and soliciting your thoughts on it.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

Additional Educational Resources: DAC Conference – for a strategic look at the issues that shape tax and economic policy in Canada and what they mean to professional advisors and their clients, please join us Nov 5 to 8 in Kelowna.


Interest Deductibility Varies on Investment Activities

When can you claim the interest on investment loans? It’s a common question but the answer depends on the investment for which you are borrowing money. In order to claim the interest when you borrow money to invest, your loan must meet three criteria.

First, the interest costs must be payable during the taxation year in question. Secondly, those costs must be reasonable. Finally, (and most importantly), the borrowed money must be invested to earn business income (considered to be “active” in nature) or income from property (considered to be “passive” in nature).

The deduction for interest expenses is possible even if the underlying asset has not produced profits yet. There simply needs to be the potential to earn qualifying income like interest, dividends, rents or royalties.

If you dispose of an investment that you borrowed money to invest in and it has lost significant value, you may continue to write off the interest on the loan as if the underlying asset still existed. But the original asset must be traceable to the loan. If you dispose of the asset at a loss, or the asset no longer exists, you may continue to write off the interest costs so long as the proceeds were used to pay down the loan amount.

What expenses can’t be claimed? The government won’t let you deduct the interest on loans used to fund registered investments. So, you’re out of luck if you borrow money to invest in your workplace pension plan, an RRSP (Registered Retirement Savings Plan), a PRPP (Pooled Retirement Pension Plan), an RESP (Registered Education Savings Plan), or a RDSP (Registered Disability Savings Plan).

An exception is interest paid on loans that are used to top up past service contributions to a registered pension plan, such as your workplace defined benefit or defined contribution pension plan. These costs may be deducted as part of the RPP contribution.

Another red flag: don’t deduct interest on loans you took to acquire assets that produce tax-exempt income, such as your TFSA (Tax Free Savings Account) or your principal residence.

Similarly, you generally cannot claim interest on a loan used to make life insurance premium payments. But an exception exists if the policy is used as collateral for a business loan and the beneficiary is the lender. Check this out with a tax services specialist.

Finally, remember this important principle: Investments in assets that produce only capital gains are excluded from the definition of qualifying income for the purpose of interest deductibility. For example, If you acquire common shares from a company that has stated it will not issue dividends, you may not be able to deduct interest on any money you borrow to purchase those shares. That’s a trap for many investors in an audit. If, however, there is a possibility that dividends may be paid in the future, deductibility of the interest costs on the loan is legitimate.

The Bottom Line. If you have borrowed to invest, or paid investment counsel fees, chances are you’ll have a deduction against all other income as a carrying charge on Line 221. But to make it real, you have to make the loan traceable to income-producing investments.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Investment Expense Claims Can Be Lucrative

Investors, be sure to claim your investment expenses on the 2016 tax return. If it’s done properly, you can save hundreds, maybe even thousands, of dollars over the years. But you have to do it correctly, or you could get into hot water.

What are investment expenses and how can you claim them? This can be a lucrative claim because all other income of the year is reduced by these charges. Because of its position on the tax return, this deduction reduces not only taxable income, but net income too, which means you may get more tax benefits from being eligible for more refundable and non-refundable tax credits.

There are two main types of investment expenses that can be claimed. The first is the most obvious: you can claim many of the direct costs associated with investing, such as the fees you pay your investment counsel or accountant for making the required tax calculations, although there are some tax pitfalls to be aware of here.

The second type of claim involves deducting interest paid on investment loans in order to reduce your net and taxable income. Here, too, there are some special rules. Let’s take a closer look at some of the tips and traps.

What kind of direct investing costs can you claim? You can deduct as a carrying charge the fees paid to a financial, investment or wealth advisor or advisory firm, for providing advice on buying or selling securities, custody of the assets, and the account record keeping and administration of those assets, as long as this is the principal business of this individual or firm. Transaction commissions, however, are specifically excluded; commissions on sales are recorded as outlays and expenses used to reduce your capital gains or increase losses on the disposition of your assets, while commissions on purchases are added to the cost base of the asset acquired. Also excluded are the costs of general financial planning services.

There are also specific rules around the claiming of tax preparation fees relating to investors. Only a portion of these fees may be deductible. That is, unless you are in the business of buying and selling securities (an active trader), or have a rental property, only the portion of the tax preparation fees relating to the investment earnings you have as a passive investor will be deductible. Therefore, it’s important to get a separate accounting for the costs of those calculations. However, if you pay your accountant to represent you in justifying your tax filings in a tax audit, those fees will be fully deductible.

Finally, you used to be able to claim the cost of a safety deposit box, but no longer. That deduction was eliminated in 2013. Also not deductible are fees paid for newspaper, newsletter or magazine subscriptions.

Next time: When can you claim interest on investment loans?

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


First Quarter Tax Filing Milestones

It’s time to take note of the tax filing requirements and investment opportunities that arise in the first quarter of 2017: January, February and March. Investors making TFSA and RRSP contributions, as well as interest payments on inter-spousal loans are affected. So are taxpayers who are making quarterly instalment tax remittances.

JANUARY – TFSAs: Additional TFSA Contribution Room. An additional $5,500 (indexed) in TFSA contribution room became available to Canadian adult residents on January 1, 2017, providing a total of $52,000 of available room since 2009. Contributions to a TFSA are not deductible, however income earned within a TFSA and withdrawals made from it are not subject to tax. TFSA activity does not affect eligibility for federal income tested benefits and tax credits, such as Old Age Security, the Guaranteed Income Supplement, the Canada Child Tax Benefit, the Working Income Tax Benefit and the Goods and Services Tax Credit.

TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. You do not have to set up a TFSA or file a tax return to earn contribution room. If, for example, an individual is 18 or older in 2009 but is not obligated to file a tax return until 2016, they would be considered to have accumulated TFSA contribution room for each year starting in 2009.

JANUARY 30: Interest Payment Due – Inter-Spousal Loans For Investment Purposes. Drawing up inter-spousal investment loans are a legitimate way for the higher-income spouse to transfer taxable investment income to their lower-income spouse to reduce the family tax bill. For several years now, the prescribed rate for spousal loans has been set at an advantageous 1%. This prescribed rate is locked in for the life of the loan, so a loan set up at 1% will continue to shield against income attribution for as long as the loan is outstanding and interest is paid annually before the January 30 of the following year. The terms of the loan should mirror commercial terms to be audit-proof.

FEBRUARY: Make RRSP Contributions; but avoid overcontributions. Here are the annual contribution limits you need to know, although it is possible for taxpayers to have higher contribution room available, depending on prior year contribution levels:

  •  For the 2016 tax year – 18% of earned income to a maximum of $25,370 (this occurs when the prior year earned income was $140,944). This contribution must be made by March 1, 2017.
  •  For the 2017 tax year – 18% of earned income to a maximum of $26,010 (this occurs when prior year earned income was $144,500). This contribution must be made by March 1, 2018.
  •  For the 2018 tax year – 18% of earned income to a maximum of $26,230. (this occurs when 2017 earned income is $145,722). This contribution must be made by March 1, 2019.

MARCH 15: Make First of 4 Instalment Payments For Tax Year 2017. The others due June 15, September 15 and December 15. Note that the remittance date is December 31 for farmers/fishers who are required to make only one instalment in the year). Instalments must be made if the estimated taxes payable (including CPP contributions and EI premiums on self-employment income) in the current and one of the two preceding tax years exceed $3,000 ($1,800 on the federal return for Quebec residents). Three remittance options are available to taxpayers:

  1. No-calculation Option. CRA will provide instalment amounts (first two based on one-quarter of taxes owing in second prior year and last two based on taxes owing in the prior year less first two instalments). Taxpayers who pay using this method will not be subject to interest on deficient instalments.
  2. Prior Year Option. Each instalment is one-quarter of the taxes payable in the prior year. If these are not sufficient to cover the current year taxes, interest on deficient instalments will be payable.
  3. Current Year Option. Each instalment is one-quarter of the estimated taxes for the current year. If these are not sufficient to cover the current year taxes, interest on deficient instalments will be payable.

MARCH 31: T1-OVP Reporting of Penalty On Tax RRSP Excess Contributions. For each month in which, at the end of the month, there is an excess amount in the taxpayer’s RRSP (i.e. more than $2,000 more than the taxpayer’s available contribution room for the year), a penalty tax of 1% of the excess amount is payable. Complete Form T1-OVP and pay the excess within 90 days of the end of the year in which there are unused contributions.

Check in with a DFA-Tax Services Specialist before the deadlines arrive if you are unsure about your filing rights or obligations.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.


Worried About Tax Troubles? Apply for Relief

New Year’s resolutions often involve the purging of winter weight, weighty closets or weights on the mind, including the guilt of understating income or overstating expenses or credits on the tax return. Personal trainers or friends can help with the first two goals, but when it comes to CRA, your most important ally is a tax specialist – an investment that can save you large amounts of time and money.

If you made an error or omission that the taxman can challenge, the penalties can be severe. Worse, they will mushroom with mach speed as the addition of interest (currently 5%), compounding daily and at four percentage points higher than the prescribed rate of interest, fertilizes the penalty.

Penalties can also be stacked one upon the other: two layers of late filing penalties for repeat offenders, gross negligence penalties of 50% of taxes owing, tax evasion penalties of up to 200% of taxes owing, as well as a series of monthly penalties for overcontributions to RRSPs, RRIFs or TFSAs are possible.

That’s where the investment in an experienced tax specialist comes in. He or she will explain that when taxpayers voluntarily comply with the Income Tax Act (ITA) to correct errors and omissions on previously filed returns or to file omitted returns, enormous savings can result—money that’s much better spent to keep you and your family smartly invested in the marketplace, or paying down post-holiday debt.

However, there is a specific process to be followed for voluntary disclosure. For example, CRA requires that before making such an application (using Form RC199), you must first be sure that relief from penalty provisions is possible. If so, interest relief is possible, too.

Remember, this process will work in your favor only if your request is voluntary. That is, you cannot make post-assessment requests for penalty and interest relief. In certain cases, there is an alternative: a request can be made under fairness provisions, for example, in the case of severe hardship.

In addition, a voluntary disclosure requires that the information is at least one year overdue, a penalty would indeed apply and the disclosure you make has to be complete, containing all relevant information. A voluntary disclosure will allow you to

  • report taxable Canadian or foreign income received
  • claim the right expenses or tax credits on the tax return
  • in the case of employers, or parents paying nannies, remit employees’ payroll deductions
  • report an amount of GST/HST, which may include net tax from a previous reporting period, rebates, unpaid tax, undisclosed liabilities, or improperly claimed refunds

No penalty relief is possible when filing returns with no taxes owing or with refunds expected, returns required in the case of bankruptcy, a claim for elections, advance pricing arrangements or rollover provisions.

From a financial point of view at least, it’s probably best to get the CRA weight off your shoulders before you tackle those hips or gut. This is one New Year’s resolution that can put you back on track for tax-efficient wealth building in 2017. After all, few circumstances can take you off your financial plan faster than trouble with the taxman.

Evelyn Jacks is President of Knowledge Bureau and author of 52 books, including Family Tax Essentials – How to Build a Wealth Purpose with a Tax Strategy.


Taxing the Rich: Will the Desired Results Occur?

President-elect Donald Trump will soon celebrate his inauguration and with his ascent to power, he has promised to reduce marginal tax rates, cut taxes, and allow businesses to expense new investments rather than deducting interest costs. In Canada, meanwhile, we await a new federal budget. What happens in the U.S., however, is relevant and could shape future taxation policies in Canada.

Top criticisms of the Trump plan: the top beneficiaries of the changes will be the 0.1% with incomes over $3.7 million who would save 14% of after tax income, compared to an 8% saving for middle income household; this according to research by the Tax Policy Centre.

For these reasons, a look at what happens when the rich are taxes provides interesting food for thought. According to a 2012 CD Howe Institute study,¹ rich people do indeed pay their fair share here in Canada. The 25,000 families who will be subject to the high-income tax in Ontario, for example, already pay 20% of all taxes. In fact, the top 1% of earners make about 12% of all income from taxable sources in Ontario but pay 27% of all income taxes.

The top 10% of earners are responsible for 66% of all net income taxes, and the top 25% are responsible for 88% of all provincial income taxes. Meanwhile, the bottom 75% of all taxpayers pay only 12% of all taxes.

What happens when we overtax the top 25% of taxpayers? According to the report, “rich” people respond to over-taxation in a variety of different ways, and the outcomes, not surprisingly, have the effect of reducing revenues to governments. In a nutshell, while some people will do nothing, many will do the things that make everything worse: reduce personal productivity by refusing overtime shifts, for example, or move to a jurisdiction with lower taxes.

That’s a particular challenge for indebted provinces. Because wealthier people have the resources to move, they will, especially if they also have skills that are in demand. In Canada, such moves tend to be inter-provincial, so those provinces that tax too aggressively may, in fact, find they will lose their top tax producers to other lower-taxed provincial jurisdictions.²

Other taxpayers will do the wrong things: they will enter the underground economy and become tax evaders, making it difficult for legitimate business owners to compete against those who don’t pay taxes. Everyone else will need to cover the tax gap, and may indeed suffer the consequences of increased audit activities and potential penalties and interest.

Most people don’t want to experience those negative outcomes. A better strategy may well be to work hard at raising the bell curve on wealth accumulation. As Former Finance Minister Michael Wilson controversially quipped in a speech to the Canadian Economics Association in 1985, after introducing the capital gains exemption and a number of other significant tax rate reforms, “Canada has an acute shortage of rich people.”

When tax policy is designed to help more middle income Canadians build more tax-efficient wealth, Canadian households can better weather market volatility, temporary unemployment, health changes, new business starts or economic uncertainty. That appears to be the direction our upcoming federal budget process will take: to champion middle class growth at the expense of top earners.

Whether any tax savings end up in the right investments, however, is up to individual choices. This is a key opportunity for investors and their professional advisors. High-income earners can respond to the possibility of rising taxes by making it their priority diversity income sources, split income within the family, and invest in a diversity of capital assets that will appreciate over time.

This strategy works just as well for the middle class; which has less disposable income to work with. Reducing taxes that are withheld from paycheques is a good place start raising wealth accumulation opportunities.

2017 TOP TAX STRATEGY: The future is now: plan for the creation of new money through tax efficiency; use it for early contributions to TFSAs and RRSPs in 2017.


 

¹2012 CD How Institute, “The Unexpected Impact of Ontario’s ‘Tax on the Rich’”.
²2004 J. Rhy Kesselman and Ron Cheung, “Tax Incidence, Progressivity and Inequality in Canada,” the Canadian Tax Journal, 52(3):709-789.


Tax Tip: Manage Net Income for 2016

Who pays higher marginal tax rates: the executive earning $250,000, or the family that makes do on $60,000? If you said the family, you would be correct. That’s because marginal tax rates are higher in income brackets that are impacted by the clawback of social benefits and tax credits. But when does that happen?

For most families, clawbacks start when family net income is around the $30,000 mark. But just how do you determine if your income is too high for refundable tax credits? For some provisions, like the Old Age Security and the Age Amount, or the Medical Expense Supplement, clawbacks are based on the individual’s net income on Line 236 of the tax return.

“Family net income” is used to determine the level of most other refundable and non-refundable tax credits, so you’ll need to have your spouse’s net income figures from Line 236 of the federal T1 return available as well to determine your eligibility for those benefits.

Maximizing the Canada Child Benefit. This lucrative credit will be sent to one parent (usually the mother), although it is possible for a father to apply for this if he is primarily responsible for the care of the child. To establish this, a Form RC66 Canada Child Tax Benefit Application must be completed. The clawback of the available CCB starts when family net income is $30,000. Another, less severe, clawback level begins at $65,000.

Tax software helps. With tax season coming, you’ll want to look into the purchase of tax software, which will automatically calculate the refundable tax credits you are entitled to, provided you have correctly indicated that you have a spouse or common-law partner and what that person’s net income is. In the meantime, use the Knowledge Bureau’s Income Tax Estimator to determine the total amount of net income for 2016. You can also project for taxes and benefits for 2017 using the Income Tax Estimator.

RRSPs do, too. It’s a good idea for couples to prepare their returns together to determine whether an RRSP contribution can help to reduce family net income. This is true for married as well as common-law relationships. In fact, when it comes to claiming tax credits, many single parents can make an important mistake; you may not know that your “live-in” relationship has tax consequences.

What if marital status changes? If your marital status changes, you must tell CRA about this on Form RC 65 Marital Status Change by the end of the month following the month of the change, so they can adjust your claim for your refundable credits. Both spouses must sign the form and submit their Social Insurance Numbers. However, if you become separated, they don’t want to hear from you until you have been separated for more than 90 consecutive days.

Correct errors and omissions now. There are lots of details that can affect who gets these credits, as you can imagine. If you have a guilty conscience about over claiming credits, you can voluntarily choose to correct errors or omissions on your tax return, thereby avoiding penalties and interest. Or perhaps you missed claiming these credits altogether by failing to file a return. File that missing return now to claim those credits.  If you need to correct the return you’ve already filed, simply adjust your return using Form T1-ADJ, which you will find in your tax software, or go online to communicate with CRA using My Account.

Remember, you can go back to recover missed provisions for up to 10 years in many cases. But if you’re going to adjust the 2006 return, do so before December 31, 2016.


Moving Soon? Keep Receipts for a Lucrative Deduction

If December is moving month for you, three pieces of advice: tax a deep breath, treat yourself to some extra eggnog, and keep those moving expense receipts handy. They will be worth a lot of money when you file your tax return.

To be eligible, the move to your new home must be at least 40 km closer to the new work location than the old home. Generally the move must be within Canada, although students may claim moving expenses to attend a school outside Canada if they are otherwise eligible. Expenses may be claimable on moves to or from Canada if the taxpayer is a full-time student, or a factual or deemed resident.

Moving before the end of the year to a lower taxed province will bring another pleasant surprise: income for the whole year will be taxed at that province’s lower tax rates.

Do I have to earn income at the new location to qualify? The answer is yes and it must be actively earned. That means moves to a retirement home won’t qualify unless you work or are self-employed at the new location. Certain students may also make the claim. Income includes:

  • salary, wages (including amounts received under the Wage Earner Protection Program Act in respect of work at the new location); or
  • self-employment income.

In addition, the taxpayer must establish a new home where the taxpayer and family will reside. For the purposes of claiming moving expenses, the following income sources are not eligible:

  • • investment or pension income
  • • Employment Insurance benefits
  • • other income sources, except taxable student awards (see below).

What this means is that if you are unemployed and move to get a job in another province, you’ll have to earn qualifying income before moving expenses are claimable. In another example, those who move and retire will need to get a job or start a business, at least for a little while, if they want to have qualifying income against which to deduct moving expenses.

If the taxpayer’s income at the new location is not sufficient to claim all moving expenses in the year of the move, they may be carried forward and applied against income at the new location in the following year or years.

Expenses relating to the move that are not paid until the next taxation year may be deducted in the year they were paid if income at the new location is sufficient or they may be carried forward to the following years.


Year-End Planning: Reviewing Taxpayer Rights On Appeal

The Auditor General for Canada has recently issued a report on CRA’s appeal process, focusing on whether CRA has been efficient in managing income tax objections. It’s important, says the report, because taxpayers have the right to impartial and timely review of their tax returns in order to avoid significant costs in time and resources when they disagree with CRA.

The overall findings were interesting:

  1. The report found that CRA took too long to process income tax objectives, contributing to a large backlog of objectives and was faulty in its measurement of performance results.
  2. The report referred to the Agency’s Taxpayer Bill of Rights (see below), which enshrines rights to a formal review, appeal and timely information. Taxpayers will incur high interest costs over a period of years when CRA is inefficient in the appeals process.
  3. The report recommended that CRA take all steps necessary to measure and report on the time required to process an objection so that taxpayers can better manage cost-benefit ratios when it comes to decision-making on objections and appeals.

CRA has enshrined sixteen basic rights that Canadian taxpayers have in their relationship with their tax department, and five specific commitments to small business. How many of them do you know? How many could you explain in a year-end conversation with a concerned taxpayer?

If you need a review, consider the following from CRA, which includes the right that taxpayers may arrange their affairs within the framework of the law to pay only the correct amount of tax, and if there are any taxes in dispute, that no income tax amounts are payable until an impartial review is provided. Reviewing this bill of rights with your clients may just open up some additional tax planning opportunities before this year is out.

Taxpayer Bill of Rights

  1. You have the right to receive entitlements and to pay no more and no less than what is required by law.
  2. You have the right to service in both official languages.
  3. You have the right to privacy and confidentiality.
  4. You have the right to a formal review and a subsequent appeal.
  5. You have the right to be treated professionally, courteously, and fairly.
  6. You have the right to complete, accurate, clear, and timely information.
  7. You have the right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review.
  8. You have the right to have the law applied consistently.
  9. You have the right to lodge a service complaint and to be provided with an explanation of our findings.
  10. You have the right to have the costs of compliance taken into account when administering tax legislation.
  11. You have the right to expect us to be accountable.
  12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances.
  13. You have the right to expect us to publish our service standards and report annually.
  14. You have the right to expect us to warn you about questionable tax schemes in a timely manner.
  15. You have the right to be represented by a person of your choice.
  16. You have the right to lodge a service complaint and request a formal review without fear of reprisal.

Commitment to Small Business

  1. The Canada Revenue Agency (CRA) is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses.
  2. The CRA is committed to working with all governments to streamline service, minimize cost, and reduce the compliance burden.
  3. The CRA is committed to providing service offerings that meet the needs of small businesses.
  4. The CRA is committed to conducting outreach activities that help small businesses comply with the legislation we administer.
  5. The CRA is committed to explaining how we conduct our business with small businesses.

These rights are an important component of any year-end tax planning discussion, especially with new clients. First, full disclosure between advisor and client can help to determine how to approach a tax problem. Next, deciding how and when to appeal for review is important.

Remember that adjustments for errors or omissions can also be made, generally for a period of up to 10 years. That means that the 2006 tax year is still available for adjustment, but only between now and December 31; after that it is closed forever to requests for refunds, or the claiming of losses, RRSP room or other carry-forward amounts. Don’t miss out on the last chance, and only for a few more weeks, to make needed adjustments as far back as 2006.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.