TaxMatters@EY - March 2014

Personal tax-filing tips for 2013 tax returns

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Janna Krieger, Toronto

With the 2013 personal income tax return filing deadline fast approaching, you may be wondering what you can do to minimize your tax bill as well as the stress involved with filing your return. While tax planning is best done early in any given year, we offer you this reminder of things to think about as you prepare your return. 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 spouse/partner, the return deadline is 16 June (for 2013), 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. Even if you are not able to pay your tax balance by the deadline, you should still file your return on time to avoid penalties. On the other hand, even though late-filing penalties and interest are based on the amount of tax owing, you should still file on time even if you expect a refund for the following 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 2016 for a 2013 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 2023 for the 2013 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.

While paper-filed returns are still acceptable, the CRA encourages electronic filing, and requires tax preparers to Efile most returns prepared for a fee (with a few exceptions).

If you file electronically, keep your receipts. The CRA routinely asks taxpayers to provide support for various deductions or credits claimed on their tax return. Note that this is for routine verification, which is not the same thing as an audit. It is a common misconception that electronic filing increases the likelihood of an audit. In fact, the CRA has stated that the method of filing is not a factor in its selection of returns for audit.

In addition to electronic filing, the CRA has been encouraging online payment of tax and offers various ways to do so. (See “How to pay your taxes.”)

How to pay your taxes

Adapted from the CRA website, www.cra-arc.gc.ca/mkpymnt-eng.html.

  • You can pay your taxes the same way you would pay your phone or hydro bill — using online or telephone banking:
    • In the list of payees, look for the Canada Revenue Agency, Revenue Canada, CRA Payment on Filing, Receiver General or a similar term. Make sure you correctly identify the type of account, your social insurance number and the tax year of your payment.
  • You may qualify to make your payment using My Payment, the CRA online payment service, if you have an online banking account with one of the following institutions:
    • BMO Bank of Montreal
    • TD Canada Trust
    • Scotiabank
    • RBC Royal Bank
  • You can make your payment at your financial institution in Canada. To do this, you will need a personalized remittance voucher, which you can ask for online through My Account or Quick Access. You can also request a remittance voucher by calling 1 800 959 8281.
  • If you want to mail your payment to the CRA, send your cheque or money order (payable to the Receiver General), along with your remittance voucher, to: Canada Revenue Agency, 875 Heron Road, Ottawa ON K1A 1B1.
  • If you are a nonresident who does not have a Canadian bank account, you can pay by wire transfer.

Foreign property 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 (but is not limited to) amounts in foreign bank accounts, shares of foreign companies (other than foreign affiliates), interests in certain nonresident trusts, bonds issued by foreign governments or foreign companies (other than foreign affiliates) and real estate situated outside Canada. It does not include personal-use property or assets used only in an active business. For example, if you own a property in Arizona that you use for vacationing, but do not rent this property when you are not there, a T1135 form is not required. This falls under the definition of personal-use property.

An individual with investments in foreign affiliates, as well as an individual who has loaned or transferred funds or property to a nonresident trust, may be required to file other 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.

New details required for 2013

New for 2013 and going forward, the T1135 form has been expanded to require more detailed information on your foreign investments, including:

  • The name of the specific foreign institution or other entity holding funds outside Canada
  • The specific country to which the foreign property relates
  • Income generated from the foreign property

Subject to the transitional relief discussed below, an exception from this detailed reporting is provided where a T3 or T5 is received from a Canadian issuer in respect of income of a particular foreign property. If several investments are held in one account, only the specific investments for which a T3 or T5 was issued would meet this reporting exclusion, so you will still have to review your portfolio for details of each foreign property to ensure the exemption applies. In fact, an investment may be excluded under this exemption in one year and not in another year, depending on whether it earned income for which a T3 or T5 was issued. Even if your property meets the reporting exemption, you’re still required to file Form T1135 claiming the exemption.

It’s important to file accurately and on time, because in addition to assessing penalties for late-filing the form, beginning in 2013 the CRA has also extended by three years the period within which it can reassess your return if you fail to report income from a foreign property on your return and Form T1135 was not filed on time, or a property was omitted from or improperly identified on Form T1135 for the year.

2013 transitional relief

On 26 February 2014, the CRA announced new transitional relief for Canadians who must comply with more detailed Form T1135 information reporting requirements for foreign property with a cost of over $100,000. The transitional relief, which applies only for the 2013 taxation year, is intended to assist taxpayers in transitioning to the more onerous reporting requirements, and responds to concerns raised by taxpayers and various stakeholders.

The relief comprises two elements:

  • Transitional reporting method — The CRA will allow a taxpayer who holds specified foreign property in an account with a Canadian registered securities dealer to report the combined value of all such property at the end of the 2013 taxation year, rather than reporting the details of each specified foreign property. A taxpayer who chooses to follow this 2013 transitional reporting method must use this reporting method for all accounts with Canadian registered securities dealers. The T3/T5 reporting exception may, however, be relied on for investments held with foreign investment brokers/dealers.
  • Filing extension — The CRA is extending the 2013 filing deadline for Form T1135 to 31 July 2014 for all taxpayers.

For additional information, read our tax alert 2014 Issue No. 17, Revised Form T1135: CRA announces new transitional relief for 2013.

Claim all your credits

Remember to take advantage of the various 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 service
  • Family caregiver amount

Consider deferring deductions

If you are unable to use all applicable non-refundable tax credits in 2013 (and they cannot be transferred or carried forward), or if you expect to earn higher income in the future, consider deferring the deduction of certain discretionary amounts, such as registered retirement savings plan (RRSP) contributions and capital cost allowance, to increase the tax benefit of these deductions at a later date.

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.

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 some gains on donated flow-through shares are subject to taxation.

New for 2013 and only available until 2017 is the first-time donor’s super credit. This is a temporary one-time credit that supplements the regular donation credit for donations made on or after 21 March 2013. A first-time donor will be entitled to a one-time federal credit equal to 40% for money donations of $200 or less, and 54% for donations between $200 and $1,000. An individual is considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed a charitable donation tax credit since 2007. The maximum donation amount that may be claimed per couple is $1,000.

And remember that if you are claiming a donation credit for a tax shelter gifting arrangement, the CRA will not assess your return until the tax shelter has been audited. Also, if you object to an assessment of tax, interest or penalties because a tax credit claimed for one of these arrangements has been denied, the CRA will be allowed to collect 50% of the disputed amount while the objection is being processed.

Capital losses

Remember that capital losses realized in the year may be applied only against capital gains. Net capital losses for 2013 may be carried back three years and applied to net gains in 2010, 2011 and 2012. 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.

Carryforward amounts

Review your prior-year return and 2012 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 2013 return. Such carryforward amounts could include net capital losses or other losses from prior years, unused 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.

Interest expense

If you’ve borrowed money for the purpose of making an income-earning investment, the interest expense incurred should be deductible. It’s 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.

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.

Pension income-splitting

If you received pension income in 2013 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.

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.

Old receipts

In gathering your information, you may stumble across old receipts that may have value in your 2013 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 2013 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 by sending the relevant details to the CRA with a letter. Depending on the nature of the omission, you may want to consider filing a voluntary disclosure. Speak to your EY advisor about whether you are eligible.

You can also make other changes to your return (including claiming missed deductions) after it has been assessed. (See “Making changes to your return” for details on how to do this).

Making changes to your return

Reproduced from the CRA website, www.cra-arc.gc.ca/nwsrm/txtps/2013/tt130423-eng.html.

It’s easy to make a correction to your income tax and benefit return if you realize you made a mistake after filing.

You will need to wait to receive your notice of assessment from the CRA before you can make a change to your return.

Once you receive your notice of assessment, you can do one of the following:

  • Use the Change my return option found in My Account, one of the CRA’s secure online services
  • Send a completed T1 Adjustment Request form (T1-ADJ) to your tax centre
  • Send a signed letter to your tax centre asking for an adjustment to your return

If you send a letter, be sure to give your name, address and social insurance number and indicate which tax year you want to adjust. You will also need to provide any supporting documents for your change. For example, if you want to change the amount you claimed for charitable donations, you have to submit all your charitable donation receipts to support your claim.

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. File form T2125 to report your business income and expenses, and be sure to complete the new part of the form to report internet business activities. (See “New 2013 requirement to report internet business activities.”)

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.

New 2013 requirement to report internet business activities

If you earn business income from one or more webpages or websites (whether it is your own website or a profile or page on anyone else’s blog, portal or directory) you must report the following:

  • The number of webpages/websites your business earns income from
  • The addresses of your top five internet income-generating sites
  • The percentage of income generated from the internet

You will be considered to earn income from a webpage or website if you do any of the following:

  • Sell goods or services through a webpage or website that are processed online, even if the processing is done by a third-party service
  • Sell goods or services through a webpage or website that requires the customer to call, complete and submit a form, or email you to make a purchase, order or booking
  • Sell goods or services on auction, marketplace or similar websites operated by others
  • Earn income from advertising, income programs or traffic generated by the website

Moving

If you moved in 2013 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 2013, you may qualify for a federal tax credit worth $750 if neither you nor your spouse/partner owned a residence from 1 January 2009 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.

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 pay your 2014 income tax liability throughout the year in quarterly instalments. You must generally submit your instalments by 15 March, 15 June, 15 September and 15 December. Late remittances may result in an interest charge.

The CRA sends notices to individuals who may have to pay tax by instalment, setting out the payments required according to their records. However, there are three allowable methods of calculating instalments and you are entitled to select whichever method results in the lowest quarterly amounts:

  • No-calculation option – The CRA’s instalment notice uses the method that requires each of your first two 2014 instalments to be one-quarter of your balance due for 2012, and your second two instalments to aggregate to your 2013 balance due, less the amounts payable in your first two instalments.
  • Prior-year option – You may choose instead to calculate each instalment as one-quarter of your 2013 balance due.
  • Current-year option – A third alternative allows you to calculate each instalment as one-quarter of your anticipated 2014 balance due.

The third alternative can result in a lower instalment requirement if your tax is expected to be lower in 2014 than in 2013. But if you underestimate your 2014 balance due and pay insufficient instalments, you will be charged interest.

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 2013 return will determine credits for July 2014 to April 2015, so anyone who will turn 19 prior to April 2015 should file their 2013 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.

Get a head start on 2014 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 revisiting your salary/dividend/remuneration needs) or other planning opportunities involving corporations.
  • 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 2014, consider requesting CRA authorization to decrease tax withheld from your salary.

Speak to your EY advisor for additional advice or assistance regarding 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.