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Category Archives: Tax Planning

Odette Morin

6 sure ways to get audited by Canada Revenue

It is that time of year when we all have to do the dreaded tax reporting to Canada Revenue.  It is painful for most of us to gather the receipts, fetch the ones missing, enter everything in the tax software, wonder if you got it right and freek out if you owe money.  A refund is for all the ultimate goal.  We do over 400 returns a year at You First and for each one of them, we sharpen our pencil, scratch our head and consult the big tax book to try to get the best refund for all. 

Even if you did everything right or hired an expert to do your return, you can still get in trouble with the tax man. Here are 6 ways you can mess up and attract an audit.
6 sure ways to get audited by Canada Revenu Agency (CRA)
  1. Not entering all T-slips: It is your responsibility to report all of your income.  If you miss a T4 for employment or an investments T3 or T5, CRA will sooner or later pick on it.  The new penalties are harsh. Each year the CRA checks the T-slip information in its database against Canadian taxpayer’s income tax returns to ensure the T-slip income reported matches. Where the income filed by a taxpayer does not match the CRA’s database records, an income tax reassessment is mailed to the taxpayer asking for the income tax due. If the taxpayer is a first time offender, they are just assessed the actual income tax owing and possibly some interest. If this is the second occurrence in the last four years, a 20% penalty of the unreported income is assessed. Fetch ALL of your tax slips.  You can’t afford to miss one!
  2. Ignoring a CRA request for additional information: CRA routinely asks to see your moving expenses, medical expenses and other deductions. Don’t be alarmed.  Since most returns are now EFile, they just ramdomly want to check your legit expenses. But if you ignore the request, if a big no no. Do not leave any CRA letter unopened. Take the time to write a cover letter and attaching your justification receipts.  If we did you tax return for that year, just contact us and we will respond to CRA for you for free!
  3. Reporting a loss for too many years on your business income or rental income.  To be entitled to deduct or write off self-employment expenses or rental expenses, you have to have a reasonable expectation for profit.  If you run a loss for too many years, the red flag will go on.  Only deduct what you are truly entitled and tone down expenses to show a profit if you must. 
  4. Showing little net income from your self-employment, yet posting lots of pictures on facebook of your new SUV, laving vacations and fine dinning meals?  Yes Big Brother CRA is looking at you!  If your net income does not match your lifestyle, be prepared to justify. 
  5. Reporting items for which you received a reimbursement.  If your employer paid for your moving expenses, you can only claim what you did not get reimbursement for.  The same goes for medical expenses reimbursed through your medical plan.
  6. High business percentage of automobile or home office expenses.  Yes we know you work in your living room sometimes or the kitchen but no, you can not claim your whole house for home office expenses.  Also, even if you say you work all the time, if you only own one car, claiming 100% of car expense just does not make sense and will be sure to attract attention.  
A lot of it, is common sense.  Be reasonable with your deductions and responsible with your tax reporting.  That is the sensible way to deal with CRA!  Wishing you all a fabulous refund this tax year!!
Odette Morin

Tax tip: RRSPs do not have to be deducted all at once

Itax tip 1f you made a large RRSP contribution, you may be best to defer some of the deduction to a future year. You would want to do this if your tax bracket will be higher in a future year. Look for the carry forward line in your tax software and play with the numbers to see the impact on the refund or tax owing, or ask us when you drop off your tax documents. We can figure this out for you!

Odette Morin

When to avoid RRSP

For most people, RRSPs are pretty hard to beat however they are a few instances that quickly come to mind when RRSPs are not the way to go.

 

  1. When you need the money in the short term, you should avoid contributing to an RRSP.  Not only you will owe the tax refund back, but you will also lose your deduction limit. Some tax advisers would recommend a short-term RRSP when your tax rate is high and will drop in the following year to benefit from the tax difference but again, I do not advocate this because eroding your contribution room is quite costly. The tax free compounding is very valuable over the long-term.
  2. When your income is going to be higher at retirement.  This is very rare but if you anticipate your income to be higher at retirement than it is today, you should avoid making an RRSP contribution. Avoid a situation where you obviously have to pay more tax later than the tax saving today.
  3. When you are close to the GIS qualification. If your savings are modest and you anticipate having very low income at retirement, it would be best to avoid RRSPs which could jeopardize qualifying for the Guaranteed Income Supplement.
  4. When you expect a very large RRSP at 71. If you calculate that your RRSP will be so big at age 71 that the minimum annual payment might clawback your Old Age Security (OAS) benefit it would be best to stop contributing to your RRSP.

If you meet one of these situations, you may be best to contribute to a TFSA or make a non-registered investment.

Careful calculations and projections must be made to plan properly.  Make sure to discuss these few points with us at your next annual review meeting.

 

RRSP or not

Terry Broaders

Read How This One Small Mistake Can Cost You A Lot of Money !

Did a missing tax slip such as a T3 or T5 or T4 show up in your mail box after you filed your taxes last spring? Did you find a forgotten one in a drawer?  You must file that tax slip with the Canada Revenue Agency (CRA) right now !

 

Thinking that CRA will simply pick it up and reassess? Think again. You will be shocked to know that a retired tax payer was recently imposed a $3,600 penalty by CRA for failing to include a T5 slip.  This penalty was on top of the interest and tax owed on the income.

 

Here is an example. In 2011 tax year you forget to report a $50 T5 slip from the ABC Financial Institution.  OK, no big deal; Canada Revenue picks up on it, reassesses you later and charges you about $15 tax on that $50 of income you forgot to report.  But you have used up your “strike one”.  Now in 2013 tax year (which you report in the spring of 2014) you have an $18,000 T5 slip that you forget to include. Canada Revenue will assess you the tax owing on that $18,000 which results in a surprise tax bill of about $5,400 plus interest.  But on top of that they will assess you a 20% penalty of the amount of income you failed to report or an extra $3,600.   So you pay the $5,400 tax you owe on that $18,000 plus a further $3,600 penalty !

 

If two T-slips in a four-year period are not reported you may face this 20% penalty.  It is 20% of the T-Slip income not reported, not of the tax owed.  This penalty is very steep and means that you need to make sure that you include all T-slips even if the amount is very small.  If you realize you have forgotten a T-Slip from 2013 or from a prior year  bring it in to us so we can prepare a T1-adjustment.

Please note that it is ultimately the tax payer’s responsibility, not the tax preparer.  As you know, we make every effort to cross reference with the previous years and with your investment accounts to ensure that all your T-slips are indeed reported.  But again, you are ultimately responsible for giving us all documents needed to prepare your declaration.

Terry Broaders

You’ve Got Mail ! ………….. from CRA !!

In early 2015 the Canada Revenue Agency (CRA) will be sending approximately 33,000 letters to selected taxpayers in early 2015.  In 2010, the Canada Revenue Agency (CRA) began a letter campaign to inform selected taxpayers about their tax obligations and to encourage them to correct any inaccuracies in their past income tax and benefit returns.The CRA will send about 33,000 letters to randomly selected taxpayers who claim business or rental losses or are employees who claim employment expenses on line 229 of their tax return. First of all if you receive a letter don’t panic, don’t be upset and don’t take it personally. Don’t leave the letter there unopened. That won’t help anything. Most taxpayers such as you are honest but inevitably CRA has to send a lot of letters to honest people first before they find a minority of those who were not so innocent.

If you are a You First client just contact us as we can advise you as to how to properly respond to the letter and will in most situations be able to take care of preparing the reply for you.  In most cases CRA is simply looking for documentation to substantiate your claims or to determine the reasonableness of your expenses. For example if you are depreciating the cost of a new car on your business expenses surely CRA is justified in determining whether or not you actually bought a new car. Or maybe you claimed over $5,000 in meal and entertainment expenses for your business even though you had only $20,000 of income. On the surface this may seem excessive but perhaps your business is the type that requires the cultivation of a great many prospects. Canada Revenue merely has the duty to determine that the expenses claimed on your tax return are legitimate.

On a personal note and from 23+ years of preparing tax returns we have seen only one single letter that required more than just the basic amount of verification to Canada Revenue. This was a situation of a client who had reported a $2,186 rental  loss on a new  apartment in his house.  While not overly complicated the response to the letter required the client to provide information on the size of the apartment in relation to the overall house; the name of the tenant; a projection as to when profitability would be achieved; and they asked for copies of the maintenance receipts. That was all that CRA wanted. A few weeks later the client received another letter from CRA to say that all was fine and then that was the end of it. See nothing to worry about.

So if you receive one of those CRA letters don’t worry.  They just want to see how honest you are !

Odette Morin

CRA wants to know what is happening in your bedroom and it is not just to be nosy.

CRA bedroom

 

 

 

 

 

 

 

You may be receiving a new questionaire from CRA regarding your true nature of your relationship.  CRA wants to know what is happening in your bedroom and they have a good reason.

Here is why? There are all kinds of tax advantages to be considered spouses.  Some disadvantages as well however.  But in many cases, to be considered spouses, especially with the new “family tax credits” and at retirement with the pension splitting advantages, it may mean several hundred or thousands of tax dollars saved.  CRA want to make sure that you are indeed common law spouses, not just roommates.

Here a link to an article written this week about this.

http://business.financialpost.com/2014/11/07/heres-why-the-cra-wants-to-know-whats-going-on-in-your-bedroom/#__federated=1