It’s a well-known fact that effective tax planning is a year-round exercise. But, during tax season, it’s useful to remind your clients of the importance of filling out their tax returns properly and making best use of the strategies available to them.
“At this point, it’s about organization and execution,” says Jason Safar, partner in the tax services practice with PricewaterhouseCoopers LLP in Mississauga, Ont.
Proper preparation starts with gathering all tax slips and relevant tax documents, Safar says, and reviewing them to see that they’re all there and that the information on those slips and documents is correct. Proper organization will eliminate time-consuming revisions later on.
“It’ll reduce the cost of your tax-return preparation,” Safar says, “it’ll increase the quality of the service you’re receiving and it’ll make everybody’s life easier.”
Here are some other tips for clients to remember at tax time:
> File A Return On Time. Every year, many Canadians choose, for a variety of reasons, to delay filing their tax return until after the filing deadline. This is a choice, tax experts say, that can have very negative consequences.
The Canada Revenue Agency assesses a penalty of 5% on any balance owing when a taxpayer fails to file on time. Taxpayers who owe money to the CRA but who don’t have the funds to pay should still file on time to avoid being assessed this penalty — although they won’t be able to avoid interest charges on the late payment.
And although some taxpayers who are entitled to a tax refund feel no rush to file by the deadline, traps may lie in wait for them.
Taxpayers who have more than $100,000 in foreign assets in non-registered accounts are required to file a “foreign income verification statement” every year with their tax return. Foreign property can include real estate, bank accounts or shares of companies listed on foreign exchanges. Failure to file this form on time results in a penalty of $25 a day for each day past the deadline to a maximum of $2,500 after 100 days.
“Even if you eventually do file your return properly, you will still be assessed a penalty for not filing this form,” says Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce’s private wealth-management division. “The CRA used to forgive first-time failure, but not anymore.”
It’s also advisable to file a return even in cases in which the taxpayer has little to no income, for a few reasons. First, the taxpayer will get back any taxes taken at the source. Second, taxpayers need to file a return in order to claim credits, such as the GST or HST credit. And, finally, filing a return will generate RRSP contribution room, which can be carried forward indefinitely.
“Sometimes, clients will ask if their teenage child, who earned money with a summer job, should file a return,” says Aurèle Courcelles, director of tax and estate planning with Winnipeg-based Investors Group Inc. “The answer is ‘yes, he or she should’ — even if it’s just for the RRSP contribution room.”@page_break@> Universal Child-Care Benefit. A tax change included in the 2010 federal budget allows single parents to claim the UCCB, which is $100 a month for children under six years of age, in the hands of a wholly dependent child.
“Instead of the single parent reporting $1,200 of income from UCCB,” says Doug Carroll, vice president of tax and estate planning with Toronto-based Invesco Trimark Ltd. , “[the parent] can effectively not pay any taxes if reporting in the hands of the five-year-old.”
> Medical Expense Credit. Family medical expenses, included those for dependent children, should be combined and claimed on the return of the lower-income parent. That’s because taxpayers can claim a credit for medical expenses above the threshold of the lesser of 3% of net income or the federal limit of $2,024 for 2010.
“Because there is an income test,” says Courcelles, “you’re always better off claiming medical expenses on the lower-income spouse.”
Also, taxpayers can claim credit for medical expenses for any 12-month period ending in the current year — not necessarily the calendar year, as many believe — as long as the taxpayer had not claimed the specific expense in the previous year.
“You try to get the biggest bang for your buck,” Courcelles says. “You almost have to have an idea of what medical bills were paid for in the past 24 months and choose the ideal 12-month period to claim.”
> Charitable Donation Credit. Couples should combine charitable donations on one return to maximize the credit. That’s because the credit is tiered: donations of less than $200 are credited at 15% for federal purposes, and at 29% above that threshold. So, the higher the donated amount, the bigger the credit.
Donations can also accumulate and be carried forward for up to five years. So, Courcelles explains, taxpayers might be advised to delay claiming a credit for charitable donations until they’ve accumulated a significant amount vs claiming a small amount every year.
> Getting A Loan To Pay The Tax Bill. Clients sometimes find themselves in a position of not having the funds to pay a sizable tax bill.
One option is for the taxpayer to secure a loan from a financial services institution at a rate lower than what the CRA charges on overdue amounts, which is the prescribed rate (currently 1%) plus 4%.
It also may be possible, if your client owns some investments, to turn this loan into one in which the interest is tax-deductible. First, the client would sell the investments and use those funds to pay the amount owing to the CRA. Then, the client would secure a loan and buy back the investments.
“If you have to borrow anyway,” Golombek says, “why not borrow for the purpose of earning income and write off the interest?” IE
Key tax tips for the deadline
Filing a tax return on time is essential for clients, not only if they have to pay the CRA but also if they’re expecting a tax refund
- By: Rudy Mezzetta
- April 4, 2011 October 30, 2019
- 12:27