Confessions of a Tax Accountant -2013- Week 1

In March of 2011, a rare idea pulsed through my brain – the brainwave? To create a series of posts called Confessions of a Tax Accountant, which would highlight contentious and/or interesting personal income tax issues that arise in my practice during income tax season. Now in my third year of confessions, I must confess, I have little to confess to. I have received so few income tax returns to date, that I have little to discuss. Ironically, the lack of returns provides one of my topics for today. Another is actually somewhat of an unusual issue, yet it is an issue everyone will most likely encounter at least once in their lifetime and has already arisen twice this year. The third issue is essentially a warning I have shared numerous times in this blog, but I think it worth repeating.

Tax Slip Deadlines

As of today, I have received 34% of the tax returns I will file this tax season, of which 11% came in the last 3 days and have not even been started. My reality is I still have to file 85-90% of my most complicated returns in the next 4 weeks. This year we are experimenting with using a portal for personal tax clients; while this makes things easier and quicker for our clients, we have had to develop and learn a whole new process. I know, you are thinking: Mark, stop whining, it’s just April 1st. However, I am making these comments in the context of why have the CRA and professional accounting bodies not addressed the annual tax filing crunch?

Although many people do not gather their tax information until after the Easter weekend (no matter the date), many others cannot finish compiling their tax information as they are still waiting for their T3’s for their mutual funds and income trusts and their T5013’s if they have partnership income. Many of these forms have just arrived or are still in the mail.

The preparation of T3’s and T5013’s are often dependent upon the receipt of T5 information (February 28th deadline) before they can be completed. So I ask, why not simply move the T4 and T5 filing deadlines to Feb 15th and the T3 and T5013’s to a March 15th deadline? I would suggest 80-90% of the T5’s issued are from financial institutions that just need to press a button and the T5 is ready for mailing. Even if I am oversimplifying the process, a February 15th deadline is very reasonable. Just saying, this crunch could easily be eliminated to accommodate taxpayers who wish to file early and at the same time, help ensure their accountants are alive and healthy to pay taxes to the CRA. A win-win for everyone. I guess it makes too much sense.

CPP Death Benefits

When someone passes away, their estate can apply for a

CPP death benefit.

The benefit is paid as a lump sum and can be as high as $2,500. This benefit is paid to the estate. Twice this year I have been asked whether the estate or beneficiary reports this income. It is actually a very good question.

The CRA states on this information page that, “If you received this amount and you are a beneficiary of the deceased person’s estate, you can choose to include it on line 114 of your own return or on a T3 Trust Income Tax and Information Return for the estate. Do not report it on the deceased person’s individual return. The taxes payable may be different, depending on which return you use.”

Where an estate will be required to file a T3 return because it has various assets to distribute and will have income, in almost all cases it will make sense to include the death benefit on the T3 return, as a testamentary trust is taxed at marginal income tax rates (at least until the government changes this as per last weeks budget proposals). But if the deceased had few assets and/or the assets were in joint ownership and there will be no need to file an estate return, the beneficiary and executors have to determine if the hassle of filing a T3 return is worth the income tax savings of filing a T3 trust return. The answer in most cases is yes.

20% Penalty

I have written several blog posts about how if

a taxpayer fails to report income twice within a four-year period then he/she will be subject to a 20% penalty on the income not reported. I thus urge you to double check that you have received all your income tax slips. If you receive a slip after you file your return, file a T1 adjustment even if the amount is very small. If you ignore that slip and miss a large slip in the subsequent three years, you will incur the penalty.

BBC Tweet of the Week

I tweeted this after last week’s budget.

Friday Funny – Latest CRA Job Listing: International Tax Snitch. No experience required. Pays up to 15% of tax collected on liabilities>$100k 🙂

Last month my blog had 28,700 page views and almost exactly 15,000 unique views. Considering I typically post once a week, I am quite pleased with the growth in readership of my blog and wanted to take the time to thank you for reading my posts and sharing them with others.

During April, I will only be answering questions submitted in the comments section of my current blog posts. Questions related to any prior blog posts will have to be answered in May. Sorry, but as discussed above, I just don’t have much time in April.

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RRSP/RRIF Spousal Transfers on Death – Not so Automatic – Be Careful you don’t Create a Family War

Most people are aware that upon their death, their RRSP/RRIF can automatically transfer tax-free to their spouse’s RRSP/RRIF if their spouse is the beneficiary of their plan. The advantage of this spousal rollover is that the income tax on the value of the RRSP/RRIF is deferred until the surviving spouse passes away.

However, if the surviving spouse has other ideas and does not transfer the proceeds of the RRSP/RRIF to a plan of their own, the possibility exists that they could end up keeping the proceeds of the plan while leaving the related income tax liability to be paid by the deceased’s estate. While this can be an issue for any family, for blended families, this has the potential to ignite World War 3.

I recently attended the Ontario Tax Conference. The participants were lawyers and accountants, most of whom specialize in income tax. I know a room full of accountants and lawyers talking tax, what could be more torturous. However, there was actually a very outgoing and passionate presenter by the name of Christine Van Cauwenberghe of the Investors Group.

Christine presented the technical details relating to this issue, from the mechanics of the “refund of premiums” to the administrative withholding requirements for financial institutions. But, in simple terms, this is what you need to understand.

When you designate your spouse as the beneficiary of your RRSP/RRIF, they will receive the proceeds of your RRSP/RRIF directly. It will then be his/her responsibility to transfer the entire proceeds to their RRSP/RRIF. If they do that, the bank issues the tax receipts in their name and there are no income tax consequences, end of story.

However, your spouse has no legal obligation to transfer these funds to their RRSP/RRIF. In fact, where your spouse rather use the funds immediately, does not get along with your natural children or is from a second or third marriage and has his/her own children and/or does not get along with their step-children, they may decide to take the money themselves and not transfer the funds to their plan. In these circumstances, the tax receipt for the RRSP/RRIF will then be issued to the deceased’s estate. While the spouse may be held jointly and severally liable by the CRA for the related income tax, if the estate has enough assets, the CRA will typically go after the estate for the taxes, not the spouse.

In order to avoid this potential minefield, Christine suggests that you designate your estate as the beneficiary of your RRSP/RRIF, with a clause that provides two alternative options:

Option 1: The beneficiary (your spouse) chooses to elect with the executor(s) to have the RRSP/RRIF amount taxed in their own name as a refund of premiums. Under this option, the spouse receives the entire RRSP/RRIF proceeds and typically transfers the proceeds to their RRSP/RRIF and the estate assists in filing an election. The required election form is Form T2019, however, you would probably not want to name a specific form in the will, only that there is an option to elect.

Option 2: If the spouse does not agree to the joint election, then they are only entitled to an allocation of the RRSP/RRIF funds net of the associated income tax liability to be incurred by the estate.

A disadvantage of designating your estate as the beneficiary of your RRSP/RRIF is that the funds will be subject to probate in most provinces. Some people feel that the probate fees (1.5% of the value of the RRSP/RRIF in Ontario) are a relatively small cost in order to prevent the potentially disastrous result of your spouse taking the entire proceeds of your RRSP/RRIF and leaving the estate to pay the related income tax.

If your spouse and children do not get along, or you have a blended family, you may wish to review this issue with the lawyer who drafted your will.

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