I am not sure if you are still receiving late T3 & T5013 slips, but if my clients are any indication, I am sure many of you are. We finish a tax return and then are provided another slip and have to re-run the return. What a waste of time for us and aggravation for the client. This week my confessions touch on four totally unrelated topics.
- The first topic is whether or not travel expenses to “check on” a rental property, especially in resort locations, are deductible.
- Unfortunately we have had to file a couple of terminal income tax returns this year for deceased clients or the deceased parents of clients. In preparing these returns, we must discuss with the legal representatives whether it makes sense to opt out of the automatic tax-free transfer to the surviving spouse. I discuss this issue in detail below.
- For my third and fourth topics, I briefly touch on which spouse can claim charitable donations and the earned income limitation that restricts certain child care claims.
Travel Expenses for Rental Properties
This year I have had a couple of clients ask if they can deduct travel expenses related to their rental properties.
The CRA’s position
is “you might travel to collect rents, supervise repairs, and manage your properties. To claim the expenses you incur, you need to meet the same requirements discussed at
. Travelling expenses include the cost of getting to your rental property. Travelling expenses do
include board and lodging, which we consider to be personal expenses.”
Since it is income tax season and I am looking for time saving alternatives, I will direct you to an excellent article written by Andy Wong on Travel Expense Advice for Landlord’s. Although slightly dated, it covers many of the issues associated with this topic.
Andy concludes his article by saying “As a rule of thumb, you should claim necessary travel costs such as when you have to be present to supervise contractors or to authorize repairs, particularly after you booted out a difficult tenant. As for claiming travel costs to check on your property annually, that’s questionable at best, unless you have a valid reason for having to be there.”
I could not have said it any better than Andy. All I would like to add is that there are really two types of travel expenses, those for rental properties in your own city or a couple hours away, such as a cottage and those to visit more remote locations, typically in resort cities such as Florida, Arizona, Las Vegas, Whistler or Banff. Where travelling by car, you should log your mileage or specifically track your gas expenses. For the more remote locations, the CRA will always consider your costs to be personal unless you have hard evidence to the contrary, notwithstanding the case Andy notes in his article.
Terminal Tax Returns – Electing Out of the Tax-Free Rollover to a Spouse
Most people are aware of the general rule that when you pass away, if your assets are left to your spouse or a spousal trust, the property will transfer tax-free at its initial cost base to your spouse, or the spousal trust. The benefit of this rollover is that is defers any income tax upon the death of the first spouse until the passing of the second spouse.
In most cases, the surviving spouse and/or legal representative will want this automatic rollover to apply. However, where a deceased spouse has minimal income on their terminal tax return or has shares of a Qualified Small Business Corporation that qualifies for the $750,000 (soon to be $800,000) capital gains exemption, it may actually make sense to elect out of this automatic rollover.
To do this, the deceased taxpayer’s legal representative makes an election in the deceased’s terminal tax return under subsection 70(6.2) of the Income Tax Act to opt out of the automatic tax-free rollover to the spouse. By making the election, the proceeds of disposition of the property to the deceased and the cost to the spouse or spousal trust are deemed equal to the fair market value of the property immediately before death.
For example, say Tim died in 2012 and he owned 500 shares of Bell Canada that were worth $40 on the date of his death and had a cost base of only $10. Tim left the shares to his spouse Anne in his will. If Tim’s legal representative does nothing, the shares transfer to Anne tax-free with a cost base of $10, deferring the capital gain until Anne passes away. But say Tim had only $10,000 of taxable income because of various deductions he was allowed on death for donations etc. Tim’s legal representative could elect to include the shares of Bell Canada in his terminal return. This would result in an additional capital gain on Tim’s final return of $15,000 ($40-10 x 500 shares). However, because he has various unused credits the Bell shares would result in minimal to no income tax on Tim’s terminal tax return. Anne would then inherit the shares with a $40 cost base instead of the $10 cost base.
The election can be made on a property by property basis. The CRA has stated that “a subsection 70(6.2) election may be made with respect to a partial shareholding of a corporation. For example, where a shareholder owns 1,000 shares of ACo, the election under subsection 70(6.2) may be made in respect of some of the shares, and subsection 70(6) will apply to the remainder of the shares.”
Donations – Mine or Yours?
Many clients provide their donation receipts to us in two piles, one for each spouse. I think the reason they do this is that they are unsure whether the donations must be reported individually or as a family.
The answer is that the CRA administratively allows donations to be claimed by either spouse, regardless of whose name is on the receipt is issued.
Since the first $200 of donations only provides a federal credit of 15% and the excess is creditable at 29%, it almost always makes sense to combine family donations, such that you are only subjected to one $200 limitation.
Earned Income for Child Care Expense Claims
In general, child care expenses can only be claimed by the spouse with the lower net income. The child care expense claim is then limited by the lessor of the allowable expense claim and 2/3 of the lower income spouses earned income. This earned income restriction came as a shock to a client who was claiming child care for the first time this year but it has surprised others over the years as well. For all intents and purposes, unless the lower income spouse has employment income or self-employment income, they will have no earned income and not be able to claim child care. Where a family will incur child care costs and one spouse will have little or no earned income (which can happen due to various reasons, most typically where both spouses are owners of a company and are compensated by dividends), consideration should be given to the following:
1. Having that spouse work part-time to earn enough income to cover all or most of the 2/3 limitation.
2. If you have your own business or are self-employed, consider employing your spouse to undertake administrative or other duties they are qualified to undertake and pay them a reasonable wage.
3. Some employers allow you to hire an assistant. If your employer allows such and will sign a T2200 form, consider hiring your spouse. Again the wage must be reasonable and they must actually work.