Back to basics at tax time

The April 30 tax filing deadline is quickly coming into view. Are your clients prepared? As an advisor you might not think it essential to remind clients about the basics, but it’s often appreciated. Not to mention Canadians are often unaware of changes to the tax code. The help you can provide cements relationships by letting clients know you’re always looking out for them.

When to file early

Anyone who expects a refund for overpayment of taxes should obviously consider filing as early as possible. After all, if a refund is expected and filing is delayed, it’s like giving the government an interest-free loan. Equally, the CRA is not as busy early on and will likely to process a refund faster.

I would go so far as to say that any client who is expecting a large refund may well be guilty of poor tax planning. A client with a large refund in successive years should be encouraged to ask their employers to reduce tax withholdings. This is done by filing CRA form T1213-Request to Reduce Tax Deductions at Source.

The CRA does pay individuals interest on overpaid taxes. Interest does not begin to accumulate until May 30 at the earliest or 30 days after the return was filed. The CRA currently pays interest at a rate of 3% on overpayments.

When to wait for the deadline

The other extreme is the expectation that additional taxes will be owed. In this case, the government is giving your client an interest-free loan, which can be a mixed blessing. In this case, it may make sense to prepare the income tax return early and then wait until the deadline to file and pay the outstanding amount. This way, you know the worst and can adjust your finances accordingly. The time can also be used to review the filing to check for any deductions or tax credits that might have been missed, thereby reducing any taxes.

Importantly, the amount owed will still be due April 30, regardless of any filing extensions. An individual who files late will be subject to 5% penalty on the unpaid taxes, plus an additional 1% per month. If your client makes this mistake a second time, the penalty will be doubled.

And one final twist: if an individual ends up owing more than $2,000, the CRA will do a calculation to see if this person should be making quarterly installment payments.

Doing it yourself

When it comes to the actual preparation of a tax return, if the return is complex and the individual is pressed for time and can afford it, by all means they should use an accountant.

Having said that, it’s also true that a good many of your clients would be well served by one of the many tax preparation software packages on the market. Most are user friendly, affordable and ensure mathematical accuracy. They also allow spouses to prepare their returns together, thereby optimizing deductions and credits to ensure the couple’s overall tax bill is minimized.

Bear in mind, if a software package allows e-filing, clients using them should be aware that the CRA may be more inclined to audit e-filings than hard-copy filings.

Claims to remember

Even with tax preparation software, it’s easy to overlook credits and deductions that can produce worthwhile tax savings. Here are some of the key reminders for your clients:

Pension splitting

Spouse can benefit from pension splitting by using Form T1032-Joint Election to Split Pension Income. Up to 50% of income can be allocated to a spouse or common-law partner, producing a lower overall tax bill and either avoiding or reducing the claw back of Old Age Security (OAS) benefits for one or both spouses. In addition both spouses may be able to claim the pension tax credit.

Credits for kids

Tax credits related to children have proliferated over the past decade and can make a difference to your clients. Start with the non-refundable tax credit for children under age 18. The children’s fitness tax credit for children enrolled in eligible physical activity programs. The children’s arts tax credit has similar requirements. There’s also an adoption expense credit that can be claimed for eligible expenses.

Students

Non-refundable tax credits for tuition, education and textbook costs can also be claimed by a student or their parents or grandparents. New for the 2011 tax year, certain types of examination fees will also be considered as part of tuition expenses when claiming the credit.

Child care

Deductions are available for child care expenses such as daycare and after-school care costs. Costs for boarding school and camp fees may also qualify. Generally, the younger the child, the greater the allowable expense claim limit.

Kiddie tax

Another change that may affect your clients for the 2011 tax year is the tweaking of the so-called “kiddie tax”. In place since 2000, this tax was designed to reduce income splitting between parents and their minor children. The tax has long covered such income sources as taxable dividends or partnership and trust income. For 2011, however, it will cover certain capital gains that will now be treated as dividends for income tax purposes.

Medical expenses

At the other end of the family spectrum, the ceiling on eligible medical expenses that can be claimed for an adult dependent relative has been removed. The $10,000 threshold was eliminated last year.

Donations

Charitable donations should also be used to create the greatest possible tax benefit. If a couple has donated more than $200 in the tax year, the receipts should be combined and claimed by the partner with the highest income, thereby maximizing the allowable credit. Don’t forget, your clients can claim as many of five years’ worth of donation receipts on the same tax return.

Additional considerations

Finally, if a client has a spouse or child with little or no income, there are some good reasons why they should still file a tax return. First, earned income determines eligibility for government programs such as the Canada Child Tax Benefit (CCTB) or the GST/HST credit. Students especially should make sure they file a return in order to claim the GST/HST credit. And even a small amount of reported income will add to future registered retirement savings plan contribution room.

Deadline exceptions

The April 30 deadline has exceptions, including individuals or their spouses who are self-employed, ran a business or if a spouse died during the tax year. In these examples the individual has until June 15 to file returns. The Canada Revenue Agency (CRA) allows the extension in these cases because it may take longer to gather the necessary filing information. However, the extended deadline in these instances doesn’t cover the actual taxes owed. They still have to be paid by April 30.

The benefit to you

Tax time is often a stressful and confusing time for Canadians. While your clients may be aware of many of these points, I would guess that they won’t know them all. Tax time is busy for everybody and it doesn’t hurt to do a quick review of the basics. Your clients will no doubt be thankful for the added effort and value provided.

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While the information provided may be intended to highlight various tax planning issues, it is general in nature. This information should not be relied upon or construed as tax advice. Readers should consult with their own advisors, lawyers and tax planning professionals for advice before employing any specific tax or investing strategy.

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