This is my last confession for this income tax season. I am now deep in the tax trenches and really looking forward to May 1st. A final reminder, please file your income tax return on time to avoid the 5% late-filing penalty.
This week I discuss the following:
- Why don’t I listen to my own advice?
- A magic act – how some people make a dividend disappear?
- The gap in service levels between investment advisors with respect to capital gain reporting.
- Donations made to U.S. charitable organizations and the related limitations.
Do as I Say, Not as I Do
It is funny how we often ignore the advice we provide to others. I have been thinking about this the last couple weeks as I have been inundated with personal tax returns and the related emails, phone calls, couriers etc. My failure to heed my own advice can be traced back to my November, 2012 blog post on
The Income Tax Cost of Working Overtime.
In that post I stated that you have no reason to decline new clients or new work based on not wanting to enter a higher tax bracket. However, I went on to say that there are times when work should be turned down.
Those times may include the following:
- You have so much work that you are overwhelmed and if you take on the new client/customer your service or product will be sub-par and your reputation will suffer.
- You are working so hard that your family life or health is suffering. In this case the extra dollars may cost you something more important than money.
As I thought about this blog post, I realized I have not listened to my own advice. The nature of tax return preparation has changed in the last 5 years. The late issuance of T3’s and T5013’s have condensed income tax season into a hellish 3-4 week period, instead of a 6-8 week period. As I contemplated this change, it hit me that I am now compromising my own health and/or taking years of my life. So I am making a public vow that I will be making significant changes to my work environment next year.
Disappearing Dividend Income
It is “cool” to be a dividend investor. Whether you are a do it yourself (“DIY”) investor or you are like many of my clients who have investment advisors or private investment firms handling their investments, maximizing dividend income seems to be the “in” thing. The issue is that many of these dividends seem to disappear without a trace and I am often called in to assist in locating the ever elusive dividend.
Inspector Goodfield is called upon when the current year’s dividend income on a 2012 return is less than last year’s dividend income. I am asked, “Where could these dividends have gone?” Well, there are typically three reasons a dividend can go “poof”.
- The first reason is one or two of the companies in your investment portfolio have cut their dividend payouts.
- The second is you are missing a T5 or T3 slip.
- The most common reason for a decrease in dividends is …… take a guess?…. Yes, it is not reporting the sale of the dividend yielding stock. Now I am not saying this is an overt attempt at tax evasion, it is just that many people sell stocks early in the year and forget they sold them or just do not properly track their capital gains and losses.
So if you filed your return with lower dividend income than last year or have not yet filed, you should always confirm that any decrease in dividend income reported year over year is the result of a dividend cut or missing T-slip and if not, review your sale transactions for the year.
Investment Advisor Chasm
In last years
Confession of a Tax Accountant Week 6
I wrote about the varying quality of assistance investment advisors provide in respect of capital gain/loss reporting and the fact that some advisors feel it is the accountant’s responsibility to track the adjusted cost base (“ACB”) of all their clients’ holdings, a contention almost all accountants dispute. Two weeks ago I discussed an offshoot of this topic, the poor reporting of flow through shares. This week I once again pick on investment advisors and their financial institutions for poor capital gain/loss reporting.
In the last couple weeks I have experienced some terrible capital gain/loss reporting by client’s advisors and/or their institutions. I have had up to 75 trades missed, non-reporting on accounts closed during the year, situations where I had to inform the advisor of all the clients accounts for which I expected capital gain/loss reports and huge adjusted cost base variances where advisors moved firms during the year (In these cases I expect the greatest of care and diligence since the cost base of investments often get lost or not carried forward properly on the transition to a new firm).
Being the BBC and not having the greatest patience even at the best of times, I have been less than subtle when expressing my displeasure in respect of this misreporting. However, to my surprise, my client’s have been unfazed, they just say “aren’t all investment advisors pretty much the same?” I confidently answer no.
For example, an advisor who works for several of my clients reconciles each clients expected interest, dividend, capital gain income and their expected interest expense and management fees. Others are constantly asking if there is anything they can do to help. So the answer is definitely no, all investment advisors are not the same.
Obviously an advisor can be administratively strong but very weak from an investment advice perspective or visa versa. But I would suggest that they very often go hand in hand and if your advisor is not providing the proper level of service either administratively or investment advice wise, you should put them notice or consider finding an advisor who will make you a priority.
With our close proximity to the United States, many Canadians make donations to U.S. charitable organizations. While I always applaud charity, you may want to consider that for income tax purposes, U.S donations (except for certain Universities and specific exceptions) are not included together with your Canadian donations, but are treated separately and are subject to separate rules. Like Canadian donations, U.S. donations are subject to an overall limitation of 75% of your net income, however, that limitation is based on U.S. source income.
In plain English, if you made a $200 donation to a U.S. organization, you must have $266 in U.S. source income to claim the $200 ($266 x.75). If you have no U.S. source income the donation is wasted, although it can be carried forward for five years.
Thus, before you donate to a U.S. cause, you may want to consider whether you are willing to forgo the income tax credit you would receive on a donation to a similar Canadian organization. If not, consider making the donation to the Canadian organization.