Archive for November, 2018

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Death in the Family: Executors’ Obligations

Year-end can be a particularly difficult time for those who have lost a loved one during the year.  But it’s important to see a tax specialist when someone in the family dies, to file any tax returns that may be outstanding on time, adjust prior-filed returns, and to claim specific tax benefits that can help to pay for end-of-life costs.

Filing deadlines. The final tax return, also known as the terminal return, must be received by CRA as follows:

  • Death Occurred between January 1 to October 31: File by April 30.
  • Death Occurred between November 1 to December 31: File within six months after date of death (May 1 to June 30). Note, however, that balances due for the surviving spouse, who may file at the same time, must be paid on or before April 30 to avoid interest charges.
  • Death of a Self-employed Person: If death occurred between January 1 and December 15, file by June 15. If death occurred in the period December 16 to December 31, file six months after date of death (June 16 to June 30). Again, balances due for the surviving spouse, who may file at the same time, must be paid on or before April 30 to avoid interest charges.

Adjust Prior Returns for the Deceased: If there are outstanding returns for prior years for the deceased, the due dates above remain the same; however, Taxpayer Relief Provisions may be applied to late returns due within the last 10 years, or to amended returns previously filed in the prior 10 years, and to waive penalties and interest in hardship cases.

 Special Privileges and Relief Options: Executors who are filing final returns may take advantage of two important special privileges for deceased taxpayers that will provide additional relief:

  • Rights and Things Returns: These additional returns can be filed to claim personal amounts in full on each return – terminal and rights or things – and to split between returns and claim other benefits to the best advantage of the taxpayer on each return.
  • Election to Defer Payment: Especially because of the deemed disposition rules for capital assets on the death of a taxpayer, it is possible that a large tax liability can occur on the death of a taxpayer. It is possible to roll over assets on a tax-free basis to a surviving spouse, and to maximize the use of previously unused tax losses. But if the final result of this astute tax filing on death is still a balance due, it is possible to postpone the tax payment until the asset is actually sold and money is received. Security for the amount owning may be posted by filing form T2075 Election to Defer Payment of Income Tax, Under Subsection 159(5) of the Income Tax Act by a Deceased Taxpayer’s Legal Representative or Trustee. Although interest will be charged by the CRA as it waits for its money, this option may provide much-needed relief when high-value, low-liquidity capital assets must be disposed of to pay taxes on deemed disposition.

Missed Prior Returns: 8 Reasons to File Before Year-End

Forget to file a tax return in a previous year? It can pay handsomely to catch up before year-end. Not only can you recover tax refunds CRA may still owe you (that’s the main reason for most), but here are 8 additional reasons to file those missed returns before year-end:

  1. To receive missed benefits and credits: The GST/HST Credit, the Canada Child Benefit, the Refundable Medical Expense Supplement, or available refundable provincial tax credits provide generous tax free income sources, but to claim them you must file a tax return. Low income earners should file to receive the Working Income Tax Benefit (WITB) or apply for advance payments in the new year, when this credit will become known as the Canada Workers Benefit.
  2. To create more RRSP contribution room and carry forward deductions: This is an important opportunity to maximize your retirement income while you are reducing net and taxable income so as to pay less tax and receive more benefits.
  3. To split pension income: To take advantage of pension income splitting with your spouse you must file an annual election. This is required by April 30. Use Form T1032 to do so. Amending or revoking elections is also possible but only for up to three calendar years after the filing due date for the year in which the election applies.
  4. To harvest losses for use in reducing past or future income: The reporting of non-capital and capital losses is often missed. Non-capital losses can occur from employment, investment, self-employment and rental ventures, whereas capital losses occur when disposing of assets for less than their adjusted cost base. Generally, these losses offset other income in the current year, and then can be carried back to offset income in the previous three previous years.  To do so use  Form T1A Capital Loss Carry Back.  Unabsorbed losses still remaining can then be carried forward  20 years in the case of non-capital losses, or indefinitely in the case of capital losses.
  5. To maximize claims for students: Be sure to file missed prior returns to help with education funding:  transfer unused tuition amounts to supporting individuals, but only if the student isn’t taxable.  Students can also carry forward unclaimed tuition, education or textbook amounts from prior years into the future when income is taxable.  Student loan interest can be carried forward, too,  for up to five years.
  6. To maximize use of medical expenses and charitable donations for the disabled and their supporting individuals: File a tax return to carry forward unused charitable donations (you can do so for up to 5 years). Medical expenses can be claimed in the best 12 month period ending in a tax year.
  7. To qualify for OAS/GIS Supplement and certain provincial health care benefits: You may be missing out on the federal income supplement for low-income seniors (Guaranteed Income Supplement or GIS) or certain provincial “pharmacare” plans when you fail to file the correct application forms. The entries on your tax return are required to verify income for these purposes.
  8. To avoid interest, gross negligence or tax evasion penalties. If you owe taxes to the CRA for prior years, your catch-up efforts will help you avoid expensive penalties and interest, which is a great way to go into the new year!

Bottom Line: Catch up on your tax filings before December 31 to maximize all your tax filing rights in the 10-year period starting January 1, 2008. That 2008 tax filing year and all its refunds, carry-forward provisions and benefits will be unavailable to you – forever – if you miss this deadline.

Tax Filing Delinquency: 8 Reasons to Catch Up Before Year-End

It pays to file outstanding tax returns before year end, not only to recover refunds that CRA may still owe you, but also to avoid paying penalties and interest that would be charged for gross negligence or in some cases, tax evasion. But also, when you don’t file on time, you miss out on important tax planning opportunities that may end for you on December 31. Here are 8 important reasons to review your return before year-end.

To the first point, it makes no sense to have CRA hold onto your tax refund; you will receive no interest payment from the government as it holds onto your money. Leaving this money in their hands means that not only is it being eroded by inflation, but you are also missing out on opportunities to maximize tax-efficient investment opportunities for your retirement. You must file a return to earn unused RRSP contribution room and class capital losses incurred in a non-registered savings account.

Second, you must file a tax return to avoid penalties and interest if you owe money to the CRA when any of the following circumstances apply to you. Do file a tax return immediately if:

1. You have taxable income and must pay federal or provincial income tax in the current tax year or any of the three preceding tax years. This is the normal statute of limitations for CRA to request additional information for audit purposes. However, if CRA expects fraud, they can go back a full ten years. A tax services specialist can help you assess if it’s to your benefit to file or adjust returns, if applicable, for the full ten-year period, whether or not fraud applies. These returns or adjustments will be accepted by the CRA.
2. You have disposed of any capital property in the year, including a principal residence, which requires the filing of form T2091 Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). Failing to file a return in this situation comes with a separate “failure to file” penalty of up to $8,000.
3. You will be required to repay OAS (Old Age Security) or EI (Employment Insurance) benefits to the government.
4. You are repaying, or are required to repay, HBP (Home Buyer Plan) or LLP (Lifelong Learning Plan) amounts to your RRSP through your tax return.
5. You are required to make contributions to the CPP or are electing not to contribute.
6. You are holding offshore properties with a cost of $100,000 or more and must file form T1135 Foreign Income Verification (whether or not you file a return).
7. You received an advance on the Working Income Tax Benefit.

Paying penalties and related interest costs is extremely expensive, and a good way to erode the wealth you are otherwise trying to accumulate in your investments. Here’s why: When you owe money to the CRA, it will charge the prescribed annual rate of interest, currently 2 percent, plus 4 percent more, on top of the taxes, repayments or additional penalties owing. That’s 6 percent compounded daily, from the date the return was due. It quickly adds up to a financial quagmire.

Here is an 8th reason to file prior-missed returns: the 2008 tax year becomes statute barred after December 31, 2018. Be sure to recover potential tax refunds, create unused RRSP contribution room and log any losses available for carry overs before then.