TaxMatters@EY - April 2013

Personal tax-filing tips for 2013

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Janna Krieger, Toronto

With the 2012 personal income tax return filing deadline fast approaching, here are some practical suggestions for you to think about. Some will save you time, some will save your nerves and — best of all — some may even save you money.

File on time

Generally, your personal income tax return has to be filed on or before 30 April. For the self-employed and their spouses/partners, the return deadline is 15 June, but any taxes owing must be paid by the 30 April deadline. Note that if all of your business operations are undertaken through a corporation, you are not personally “self employed,” so the usual 30 April deadline applies.

Failure to file a return on time can result in penalties and interest charges. However, since these charges are based on the amount of tax owing, if you expect a refund you may not feel compelled to meet the deadline. This is unwise for three reasons:

  • If a tax liability does arise, perhaps as a result of an error in the return or a denial of certain deductions, you may suddenly be in a position where penalties and interest apply.
  • If you expect a refund, it’s in your best interest to file as early as possible to get your refund. Although the Canada Revenue Agency (CRA) does pay interest, the interest clock does not start until 30 days after the later of the 30 April due date (even for the self employed) and the date the return is actually filed. Late filing could mean a loss of potential refund interest.
  • In the worst case, delaying too long can result in the refund being lost. Filing more than three years after the end of the year (later than 31 December 2015 for a 2012 return) means the refund is not payable, although the CRA has discretion to issue the refund provided the return is filed within 10 years (by 31 December 2022 for the 2012 return).

Use software

Using software to prepare your tax return offers many benefits. Return preparation is generally quicker, easier and less prone to mechanical error. Plus, the programs often allow you to optimize credit or deduction claims between spouses or common-law partners, and include helpful tax-filing hints based on the information you input.

Using software may also give you the option to file your return electronically. The CRA’s processing time of electronically filed returns is generally shorter than that associated with paper returns. Electronic filing options include Netfile and Efile. In order to Netfile, you will have to use approved tax return software. Alternatively, you can have your return filed electronically, for a fee, by an approved Efile agent.
 

How the CRA selects tax returns for review

Edited from the CRA website, cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/slctd-eng.html.

There are a number of reasons why an income tax return may be selected in one of the CRA’s review programs. These reasons include:

  • Random selection
  • Comparison of information on returns to information received from third-party sources, such as T4 information slips
  • Types of deductions or credits claimed and an individual’s review history

The process of selecting returns for review is the same whether the return is filed on paper or electronically. Therefore, the chances of a return being selected for review are not impacted by the method used to file the return. The CRA refines the focus of its reviews annually based on review results and problem areas identified.

Most of the 25 million income tax returns filed each year are processed within two to six weeks. The CRA processes most returns without conducting a manual review of the information reported so that a Notice of Assessment and/or refund can be issued as quickly as possible. However, all returns are screened by the CRA’s computer system and may be subject to review at a later date.

You should keep all receipts and documents to support your claims for at least six years in case you are selected for review.

For more information, see the CRA’s General Income Tax and Benefit Guide and Information Circular IC78-10, Books and Records Retention/Destruction.


Claim all your credits

Remember to take advantage of the various family-related tax credits that might apply to you. These include the following:

  • Child tax credit for children under 18
  • Children’s fitness credit and children’s arts credit
  • Public transit credit (for you, your spouse/partner or minor children)
  • Adoption expense credit
  • Tuition, education and textbook credits transferred from a child
  • Credit for the costs of exams for accreditation as a professional or tradesperson
  • Credit for individuals performing at least 200 hours of volunteer firefighting services
  • New for 2012, the family caregiver amount

Carryforward amounts

Review your prior-year return and 2011 notice of assessment, or access your records online to determine if you have any carryforward balances that may be used as deductions or credits for your 2012 return. Such carryforward amounts could include net capital losses or other losses from prior years, unused registered retirement savings plan (RRSP) contributions, unclaimed charitable donations (as described further below),unused tuition, education and textbook amounts, interest on student loans, resource pool balances and investment tax credits.

Consider deferring deductions

If you are unable to use all applicable non-refundable tax credits in 2012 (and they cannot be transferred or carried forward), or if you expect to earn higher-rate income in the future, consider deferring the deduction of certain discretionary amounts, such as RRSP contributions and capital cost allowance, to increase the tax benefit of these deductions.

Pension income-splitting

If you received pension income in 2012 that is eligible for the pension income credit, remember that up to half of this income can be reported on your spouse’s or common-law partner’s tax return. You’ll reap the greatest benefits when one member of the couple earns significant pension income while the other has little or no income.

However, benefits may also be available in other, less obvious circumstances. In some cases, transferring income from a lower-income pension recipient to a higher-income spouse can carry a tax benefit. If you’ve overlooked this opportunity in a previous year, you should be aware that the CRA is generally willing to accept a request to file a late election up to three years after the assessment date of the returns in question.

Charitable donations

There are a number of filing suggestions relating to donations. The federal tax credit for donations is available in two stages ― a low-rate credit on the first $200 of donations and a high-rate credit on the remainder.

To benefit from the high-rate credit and save a small amount of tax, only one spouse or partner should claim all of the family donations. If your family’s annual donation amount is not high, consider accumulating donations over a few years and claiming them all in one year to increase your benefit from the high-rate credit. The donation credit is available for donations made within the five preceding years.

And remember that if you donated stocks, bonds or mutual funds to a charity, none of the related accrued capital gain is generally included in your income, although a recent change subjects some gains on donated flow-through shares to taxation.

Medical expenses

The claim for medical expenses is limited by an income threshold. In other words, the lower your net income, the more you can claim.

As a result, it’s generally beneficial to claim all family medical expenses in the lower-income spouse’s/partner’s return. Remember, though, this is a non-refundable credit, so the individual who makes the claim should have sufficient income tax payable — both federal and provincial — to absorb the entire credit.

Family medical expenses include those for you, your spouse/partner and your minor children. Expenses for other family members who are dependent on you for support, including adult children, parents, grandparents, siblings, aunts, uncles, nieces and nephews, can also be claimed, subject to reductions based on their income. In the past, such claims were limited to $10,000 per family member, but that limitation has now been eliminated.

Old receipts

In gathering your information, you may stumble across older receipts that may have value in your 2012 return. Specifically, charitable donations can be carried forward and used in any of the five years after the year the gift is made. You can claim medical expenses for any 12-month period that ends in 2012 if you haven’t claimed them previously.

In addition, under the taxpayer relief provisions, the CRA has the discretion to make adjustments to previously filed returns (10 years back) in relation to certain errors or omissions, on the taxpayer’s request.

Old slips

On the other hand, if you stumble across old income slips that you may have missed, or if you receive a slip after filing your return, you may be tempted to leave it for the next year or let the CRA assess you based on its records. This is not a good idea because it would be considered a failure to report income, and if you have also missed any income in any of the three preceding years, you will be subject to a penalty for repeated failure to report income, which could be significant. Report any missed income as soon as you find it.

Filing returns for children/students

In many cases, there may be benefits to filing tax returns for children even when it’s not required.

If your children had part-time jobs during the year or earned some money for small jobs, such as babysitting, snow removal or lawn care, by filing a tax return they report earned income and thus establish contribution room for purposes of RRSP contributions, which they can make in a future year.

Another advantage in filing a return for teenagers is the availability of refundable tax credits. Several provinces offer such credits to low- and no-income individuals. When there is no provincial tax to be reduced, the credit is paid to the taxpayer. There is also a GST/HST credit available for low- and no-income individuals over age 18 that is generally only paid if an income tax return is filed. The 2012 return will determine credits for July 2013 to April 2014, so anyone who will turn 19 prior to April 2014 should file their 2012 return.

Finally, university students should always file tax returns and claim eligible tuition, education and textbook amounts. Unused amounts are transferable to a supporting spouse, parent or grandparent up to a maximum of $5,000 (federal) per person. Once established, credits that cannot be used or transferred in the current year can be carried forward and claimed by the student in a later year.

Business owners

If you’re self-employed (that is, you carry on an unincorporated business, the income from which is reported directly on your personal tax return), there are a number of business-related expenses you can claim.

Ensure that you take advantage of all available deductions, including automobile expenses, parking, business association fees, home-office expenses (if you qualify), entertainment, convention expenses (a maximum of two per year), cell phone, depreciation on your computer and salaries paid to assistants, including family members.

Remember that in many cases, you can deduct private health-care premiums as a business expense instead of a medical expense, and one-half of Canada Pension Plan paid in respect of self-employed earnings is deductible instead of creditable.

A word of caution: if you claim home-office expenses, you’re likely better off not to claim the depreciation on the home-office portion of your home. Although this will give you a deduction in the current year, you will lose some of the capital gains protection available from the principal-residence exemption.

And finally, if you have business losses from prior years, you may only want to use sufficient losses to offset income taxed at the higher tax brackets and keep some losses to offset similar high-rate income in the future. You should not use losses to reduce income below your non-refundable tax credits.

Moving

If you moved in 2012 to start a new job or a new business, or to attend university or college on a full-time basis, you may be able to claim expenses relating to the move.

In addition to the actual cost of moving your furniture, appliances, dishes, clothes and so on, you can claim travel costs, including meals and lodging while en route.

Lease-cancellation costs, as well as various expenses associated with the sale of your former residence, are also deductible, including up to $5,000 in costs associated with maintaining a former residence that was not sold before the move.

The expenses are only deductible to the extent of income from the new work or business location (or for students, taxable scholarships or research grant income). If this income is insufficient to claim all the moving expenses in the year of the move, you can carry forward the remaining expenses and deduct them in the following year, again to the extent of income from the new work location. Expenses paid after the move cannot be carried back.

Home purchasers

If you acquired a home in 2012, you may qualify for a credit worth $750 of federal taxes if neither you nor your spouse/partner owned a residence from 1 January 2008 to the date you purchased your new home.

However, if you bought your new home for the benefit of a family member eligible for the disability tax credit so they could be more mobile or functional in an environment that’s better suited to their personal needs or care, the credit is available regardless of your history of home ownership.

Capital losses

Remember that capital losses realized in the year may be applied only against capital gains. Net capital losses for 2012 may be carried back three years and applied to net gains in 2009, 2010 and 2011. File form T1A, “Request for Loss Carryback,” to carry the loss back to those years and recover the related tax. Losses that cannot be carried back may be carried forward indefinitely. Where capital losses are incurred on certain shares or debt of a small business corporation, they may qualify as business investment losses that may be claimed against any income in the year, not just capital gains.

Interest expense

If you have borrowed money for the purpose of making an income-earning investment, the interest expense incurred should be deductible. It is not necessary that you currently earn income from the investment, but it must be reasonable to expect that you will. Interest on the money you borrow for contributions to an RRSP, registered pension plan or tax-free savings account, or for the purchase of personal assets such as your home or cottage, is not deductible.

Rental properties

If you own property and rent it as a source of revenue, the income or loss must be reported on your tax return. If a net rental loss results, it can generally be deducted against other sources of income for the year.

Expenses you incur to earn rental revenue can generally be deducted against this revenue. These expenses can include mortgage interest, property taxes, insurance, maintenance and repairs, utilities, advertising and management fees. Capital expenses, such as the cost of the building (but not land), furniture and equipment, may be deducted through capital cost allowance (depreciation) over a period of years. However, capital cost allowance may only be claimed to the extent of rental income before any claim for capital cost allowance. In other words, you cannot create or increase a rental loss through the deduction of capital cost allowance.

If you change all or part of your principal residence into a rental property, or move into a rental property that you own, you will be considered to have disposed of all or part of the property at the time you change its use from either personal to business or business to personal, as the case may be. As a result, you may have to report a capital gain on your tax return. However, you may qualify for a “no change in use” election, which allows you to extend principal residence treatment and either reduce or defer the tax on the gain under certain conditions.

Remember your foreign reporting requirement

If you hold, at any time in the year, certain property outside Canada with a total cost amount of more than $100,000, you must file form T1135, “Foreign Income Verification Statement.” Such foreign property includes amounts in foreign bank accounts, shares in foreign companies, interests in non-resident trusts, bonds issued by foreign governments of foreign companies, and real estate situated outside Canada. It does not include personal-use property or assets used only in an active business.

Similarly, an individual with foreign affiliates, as well as an individual who has loaned or transferred funds or property to a non-resident trust, must also provide specific information returns.

Failure to report foreign property on the required information return will result in a penalty.

Note that even if you disposed of the property during the year and no longer meet the reporting threshold at the end of the year, as long as you met the threshold at any time in the year you must file form T1135 for the year. This form is due at the same time as your tax return, and as of yet cannot be filed electronically, so if you file your return electronically, be sure to mail this form to the CRA.

Update your instalment calculation to manage your cash flow

If you earn income that is not subject to withholding (e.g., rental, investment or self-employment income), you may be required to prepay your 2013 income tax liability throughout the year in quarterly instalments.

The CRA sends notices to individuals who may have to pay tax by instalment, setting out the payments required according to their records. However, you are allowed to use three methods to calculate your instalment obligation and you are entitled to select whichever method results in the lowest quarterly amounts.

Under the first method, the CRA determines the suggested instalments on the basis of your net taxes payable for the two previous years. For example, for 2013, each of the first two instalments would be calculated as one-quarter of the balance due for 2011. The last two instalments would aggregate your 2012 balance due, less the amounts payable in the first two instalments.

Alternatively, you may choose to calculate each instalment as either one-quarter of the total balance due in the prior year (second method), or one-quarter of the estimated net tax owing for the current taxation year (third method).

If you expect your 2013 income to be lower than 2012, consider using the current-year method and paying lower instalments.

Note, however, that if you use the second or third method and underestimate your 2013 balance due and pay insufficient instalments, you will be charged interest and possibly a penalty. However, you will not be charged instalment interest if you pay according to the CRA’s calculation (the first method), even if your tax liability is higher than the suggested instalments paid for the year.

Get a head start on 2013 savings:

  • Contribute early to your RRSP or RESP to maximize tax-deferred growth, and to your TFSA to maximize tax-free growth.
  • Consider income-splitting opportunities such as prescribed-rate loans, or reasonable salaries to a spouse or child for services provided to your business.
  • Consider tax deferral opportunities using corporations (such as incorporating investment portfolios in certain provinces, or revisiting your salary/dividend/remuneration needs).
  • If you’re planning on selling an investment or earning income from a new source in the year, consider opportunities to realize and use losses to offset that income.
  • Maintain your logbook to support business use of automobile expenses throughout the year.
  • Consider converting non-deductible interest into deductible interest by using available cash (perhaps a tax refund) to pay down personal loans, and then borrowing for investment or business purposes.
  • If you expect to have substantial tax deductions in 2013, consider requesting CRA authorization to decrease tax withheld from your salary.

Speak to your EY advisor for additional advice or assistance regarding claims available on your personal tax return.

For many more helpful tax-saving ideas and handy tips throughout the year, download your copy of our annual guide Managing Your Personal Taxes: a Canadian Perspective.