Tax Factor 2013-02

February 19, 2013

The 2013-02 issue of the Tax Factor is available for download. In this issue, we cover:

Getting ready to file your personal tax return
Tackling your tax slips
U.S. estate tax changes
U.S. reporting requirements may affect Canadian financial institutions


Getting ready to file your personal tax return

It is almost that time again. As you likely already know, your 2012 personal income tax return must be filed on or before April 30, 2013. If you or your spouse (or common-law partner) are self-employed, your tax return filing deadline is extended to June 17, 2013; however, any balance of tax owing for the year is due by April 30. In either case, this means that if you haven't already begun getting your financial records and slips ready, you should start doing so now. (For more information about getting your tax documents in order, see Tackling your tax slips.)

This article highlights two federal tax changes that may impact your personal tax return, which became effective for 2012, as well as certain beneficial tax credits and deductions that are often overlooked. When discussing non-refundable tax credits, we have made reference to the federal income tax rules. Note that the rules may vary by province and territory.

What is new for 2012?

Family caregiver tax credit

For 2012 and subsequent taxation years, a new family caregiver tax credit is available to individuals who support infirm dependants. The credit is a $2,000 enhancement to amounts already available under existing dependency-related non-refundable credits, including the:

  • spouse or common-law partner amount;
  • amount for an eligible dependant;
  • amount for children born in 1995 or later; and
  • caregiver amount.

Keep in mind that you are able to claim the credit for more than one eligible dependant. However, the dependant with the impairment must be an individual 18 years of age or older and dependent on you because of an impairment in physical or mental functions, or a child under 18 years of age with an impairment in physical or mental functions. In respect of a child, the impairment must be prolonged and indefinite and the child must be dependent on you for assistance in attending to personal needs and care when compared to other children of the same age. Note that the amount for infirm dependants age 18 or older has also been enhanced by $2,000 for this credit. For more information on this credit and the documentation that you are required to have to support your claim, contact your BDO advisor.

Mandatory electronic filing for tax preparers

Starting this year, tax preparers who prepare and file more than 10 corporate or 10 personal income tax returns (excluding trust returns) will, with some exceptions, be required to file them electronically. In cases where a taxpayer refuses to file a return electronically, it would be the preparer who will be exposed to a potential penalty for utilizing an incorrect filing method. If your return has not been electronically filed in the past, discuss the implications of this new requirement with your BDO advisor.

What not to forget on your 2012 personal tax return

As you begin accumulating your slips and receipts to complete your 2012 personal tax return, don't forget the many deductions and tax credits that may be available to you. Here is some information on several tax credits and deductions that you may have forgotten about or not considered.

Medical expense tax credit

The medical expense tax credit allows you to claim eligible medical expenses that you incur for yourself, your spouse (or common-law partner) or your (or your spouse or common-law partner's) children who were under age 18 and dependent on you for support. You can claim eligible medical expenses to the extent that the amounts incurred exceed the lesser of $2,109 (for 2012) and 3% of your net income. In addition, you can claim medical expenses incurred for certain other dependent relatives. In this case, your claim for each person is limited to the eligible amounts paid in excess of the lesser of 3% of the dependant's net income and the 2012 threshold amount of $2,109.

Many individuals often assume that they will not be eligible for the medical expense tax credit due to the high minimum threshold that is applicable to eligible expenses. Be careful to not make this mistake and ensure you gather all of your eligible medical receipts together, as there are many different expenses that can be claimed. Expenses that are sometimes overlooked include premiums you paid for a health services plan through payroll deductions or for a medical insurance plan to travel. A non-exhaustive list of eligible medical expenses is provided on the Canada Revenue Agency (CRA) website. You should note that effective for the 2012 taxation year, blood coagulation monitors that are prescribed by a doctor are now considered eligible medical expenses. This type of expenditure includes disposable peripherals such as pricking devices, lancets and test strips for a person who requires anti-coagulation therapy.

Due to the fact that large medical expenses may not be incurred evenly throughout the year, or may not be confined to one calendar year, you may select any 12-month period ending in the tax year and claim the expenses paid in that period. Taking advantage of this rule could help you to exceed the minimum threshold if you would not otherwise do so, and it will help to maximize your credit for a tax year. Remember to send all of your medical receipts to your BDO advisor, even if you are uncertain which ones are eligible.

Public transit tax credit

Have you incurred any costs associated with transit passes in 2012? If so, you may be entitled to a non-refundable tax credit in respect of the cost of these passes, or electronic payment cards, that you used for public transit on a regular basis. This includes the cost of monthly public transit passes or passes of longer duration such as an annual pass for travel. You can also claim the cost of short duration passes to the extent that each pass entitled you to unlimited travel for an uninterrupted period of at least five days and you purchased enough of these passes so that you were entitled to unlimited travel for at least 20 days in any 28-day period. Similarly, you can claim the cost of electronic payment cards to the extent that the card was used to make at least 32 one-way trips during an uninterrupted period not exceeding 31 days and the card was issued by a public transit authority that records and provides a receipt for the cost and usage of the card. It is worth noting that costs for transit passes are restricted to those passes which provide for an unlimited number of rides over a specified period of time. A recent court case decision held that a pass that limits rides to a specified number, although it can be used at any time (for example, a ten-ride pass), is not one that is eligible for the credit. You should also note that you can claim this tax credit not only for yourself, but also on behalf of your spouse or common-law partner and your children under the age of 19, to the extent that these amounts have not already been claimed.

Donations and gifts tax credit

If you made any charitable, Crown, cultural or ecological gifts in 2012, then you may be entitled to claim a tax credit related to those donations. The credit in respect of the first $200 of charitable donations is calculated using the lowest tax rate of 15%, and the credit arising from donations over $200 is calculated using the highest rate of 29%. The maximum annual claim for charitable donations is 75% of your net income for the year. However, any donations that you have made in excess of that amount may be carried forward for five years. If you have made a donation of property, the donation limit can be as much as 100% of the resulting taxable capital gain (or recapture, in the case of depreciable property) to the extent that the capital gain has been included in your income.

The CRA will allow you to claim charitable gifts made by you and your spouse. Therefore, the official charitable gift receipts can be pooled on one spouse's return for a higher claim. Note that if you come across any receipts for charitable gifts you or your spouse made in the past five years that have not yet been claimed, pass them onto your BDO advisor who will determine whether they can be claimed on your 2012 tax return.

Work-space-in-the-home expenses

Due to the high cost of commuting and recent technological advances, working from home has become more commonplace. If you were one of the many Canadian employees who worked from home in 2012, you can deduct some of the work-space expenses you paid as long as the work-space is where you mainly (i.e. more than 50% of the time) performed your work, or you used the work-space only for the purpose of earning your employment income. In the latter situation, you must have used the work-space on a regular and continuous basis for meeting with your clients or customers. Keep in mind that you can deduct the portion of your costs that related to your work-space, such as a proportion of the amounts you have paid for the maintenance of your home, heat and electricity, and cleaning materials. If you are a commissioned salesperson or a self-employed individual, you may be able to deduct additional expenses for a home office if you own your own home. To learn more about the expenses you may be entitled to deduct, read our tax bulletin titled Deducting Expenses as an Employee.

Don't forget that as an employee, you can only deduct work-space expenses from the income to which the expenses relate, and not from any other source of income. That being said, if you cannot fully deduct all the work-space expenses you incurred in 2012, you can carry forward some of the expenses to a subsequent year. Bear in mind however, you may only deduct these expenses in a subsequent year if you are reporting income from the same employer. As well, remember that you cannot create or increase a loss from employment by carrying forward work-space expenses. Be sure to retain a completed copy of Form T2200, Declaration of Conditions of Employment, which has been signed by your employer to support your claim. The rules to determine the amount of deductible work-space-in-the-home expenses can be complicated — your BDO advisor will help you work through the details.

Moving expenses

If you moved in order to be closer to a new business or employment location within Canada in 2012, you may be able to deduct your moving expenses against the income earned from that new work location. Sometimes overlooked is the possibility that students who moved to attend a post-secondary institution on a full-time basis, either within or out of Canada, may deduct their moving expenses. For students, the expenses can only be deducted from scholarships, fellowships, research grants and similar awards, and only to the extent that the income is taxed on their return. Bear in mind that you must have moved at least 40 kilometres closer to your new work location or post secondary institution. This distance is measured by the shortest normal route available to the travelling public.

If you moved in 2012 to be closer to your work or business and are not able to claim all of your eligible moving expenses on your 2012 personal income tax return, you may be able to deduct the remainder of these eligible moving expenses from the employment or self-employment income you earn at your new location in a subsequent year. Be sure to provide the details of your moving expenses to your BDO advisor.

RRSPs — contributions and the home buyers' plan

Registered Retirement Saving Plans (RRSPs) have long been popular with Canadians as they offer a tax-effective way to save for retirement. For 2012, the maximum RRSP deduction limit that you may claim is $22,970.To be deductible, RRSP contributions for 2012 can be made at any time during the 2012 calendar year or within the first 60 days of 2013. The last day an RRSP contribution can be made to be deductible for 2012 is March 1, 2013. You can determine how much to contribute to your RRSP by referring to your previous year's Notice of Assessment, or by using one of CRA's online services or their automated Tax Information Phone Service. Just be sure to factor in any contributions you have already made, either directly or through your employer, to ensure you do not overcontribute.

It is important to note that you don't need to deduct contributions in the year they are made. It may be beneficial to make an RRSP contribution now to take advantage of the tax-free accumulation of funds in your RRSP, and deduct the contribution in a future year when you know you will have higher taxable income. Talk to your BDO advisor about what makes sense for your personal situation.

Another point to remember – if you used the Home Buyers' Plan (HBP) to withdraw funds from your RRSP to build or purchase a home, be sure to inform your BDO advisor of this when you provide them with your personal tax information. You will need to begin making repayments in the second year following the year you made the withdrawals by contributing to your RRSP. All or a portion of your contributions must then be designated as a repayment under your HBP on your tax return in order to avoid an income inclusion. Similarly, if you used the Lifelong Learning Plan to withdraw amounts from your RRSP for education purposes, it is important to update your BDO advisor for tax purposes. Note that repayment terms can vary for this plan.

For more information on the RRSP rules, read our tax bulletin titled Answering Your RRSP Questions.

Summary

In addition to the tax credits and deductions discussed above, there are likely others which you may benefit from. As well, don't assume that there is no reason to file a tax return if you (or your family members) don't have any income. Certain credits and benefits, such as the GST/HST credit and some provincial credits, require a return to be filed in order to receive the credit or benefit. For you and your family members to take advantage of all eligible tax credits and deductions, be sure to provide your BDO advisor with the relevant information for your family.

As the page on your calendar quickly turns, you will undoubtedly want to make sure your financial records and slips are accessible so that you may claim all of the tax credits and deductions that are available to you. And as you accumulate your 2012 slips — if you come across any receipts from previous years that could have been used to claim a deduction or credit, rest assured that it may not be too late to send them to your BDO advisor to make an adjustment on a prior year return. Finally, if you have any questions about which tax credits and deductions you are eligible for, contact your BDO advisor.

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Tackling your tax slips

This month marks the start of the annual T-slip "blitz". You can expect any employment and pension related slips, including T4 and T4A slips, to be sent out to you by the last day of February. This same deadline also applies to T5 slips, which report investment income such as interest and dividends. These due dates are followed by the April 2, 2013 deadline for distributing 2012 slips to report income from a trust (T3 slips). This deadline to report 2012 income is also shared with many partnerships, who generally report partnership income on T5013 slips.

While the inclination may be to simply set the tax slips aside until your annual trip to your tax return preparer's office, you may want to consider resisting the urge to stockpile your slips and receipts in favour of a more organized and itemized approach. A written checklist or personal tax organizer can help you keep track of the information slips and income receipts you are expecting, and identify whether any of these are missing. Collecting and assembling your tax information in such detail can help you to ensure that all of your income-related information has been received, thereby preventing any omissions in reporting income for the year. Contact your BDO advisor if you are interested in learning more about tools available to help you assemble and track your 2012 income tax slips and receipts.

Making certain that all sources of income are reported each year not only ensures that you'll pay the appropriate amount of tax and avoid interest on underpaid tax, but it also makes sure that you avoid the penalty that applies when you fail to report income in more than one year. More specifically, if you fail to report an income amount in the current year and have failed to report an income amount in any of the three preceding tax years, a 10% federal penalty will apply. The penalty applies to the amount of unreported income, even if the income was subject to withholding at source. In addition, another 10% penalty could be payable for provincial/territorial tax purposes. While a due diligence defence is available under common law against the imposition of this penalty, it will be up to the taxpayer to establish that reasonable steps were taken to comply with the tax rules. Based on comments by the Canada Revenue Agency (CRA), this means that the onus will be on you, as the taxpayer, to show that efforts were made to either estimate the income or advise the CRA of the omission on a timely basis. For a more detailed discussion of this penalty, read "A cautionary word about repeated failures to report income" in our 2012-02 issue of the Tax Factor.

As can happen in real-life, information slips may be received late (or even not at all). When this occurs, there is an increased risk of unreported income and the application of the penalty for repeated failures to report income. If you are required to file a tax return, be sure to file on time to avoid any late-filing penalties, even if you haven't received all of your tax information slips or receipts for the 2012 reporting year. Before filing, contact the issuer of any missing information slips or income receipts and request a duplicate. If you won't be able to receive the information in time to file by the deadline, you should estimate "missing" income amounts to the best of your ability. Supporting documents, such as pay stubs or account statements, may aid in this regard. As well, any related deductions or tax credits that may be available can be claimed. Be sure to retain your supporting information in case the CRA requests to see it. Note that, if necessary, you can request an adjustment to your tax return once the actual slips or receipts are received and the amount of income is known with certainty.

As Benjamin Franklin once (famously) noted, "an ounce of prevention is worth a pound of cure". Taking the time to manage and collect all of your information slips and income receipts before preparing and filing your income tax return can help you avoid paying unnecessary taxes, interest or penalties.

Speak to your BDO advisor for more information and recommendations on how to stay organized in anticipation of preparing your 2012 personal income tax return.

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U.S. estate tax changes

Recent U.S. income tax legislation, the American Taxpayer Relief Act, is of interest to Canadians who own U.S. real property or other U.S. situs property, such as U.S. securities, and who may become subject to U.S. estate tax. This legislation, passed to avert the "fiscal cliff", prevents the steep increase in estate and gift taxes that was to occur for individuals dying and gifts made after 2012. The exemption level for estate tax was to be reduced to $1,000,000 U.S. With the recent legislation, the exemption level will be kept at the previous level of $5,000,000 U.S. (which indexed for inflation is $5,250,000 U.S. for deaths in 2013). But, not all of the news is good — starting in 2013, the top rate of estate and gift taxes increases from 35% (in 2012) to 40%. However, the new higher rate is better than the top tax rate that would have been in place without the American Taxpayer Relief Act. The top rate was scheduled to increase to 55% due to a sunset clause in the previous legislation.

Canadians who are not U.S. citizens do not benefit from these changes directly. Under U.S. domestic tax law, U.S. estate tax is applicable on U.S. situs property owned by non-residents, and the exemption is only $60,000 U.S. This exemption did not increase as a result of the estate tax changes. But, the Canada-U.S. tax treaty provides Canadians some relief from U.S. estate tax. The treaty allows Canadians to benefit from the same exemption amount that U.S. persons can claim. However, the exemption is prorated based on the ratio of the value of U.S. situs assets compared with the value of the estate as a whole. Therefore, Canadians with gross estates of more than $1,000,000 U.S. can benefit from the changes in the recent U.S. tax legislation. For more information on how the U.S. estate tax applies to any U.S. properties you own, contact your BDO advisor.

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U.S. reporting requirements may affect Canadian financial institutions

The U.S. enacted legislation in 2010 to help the U.S. Treasury identify U.S. residents and citizens who invest offshore. With this information, the U.S. government will be in a much better position to enhance and enforce compliance with U.S. tax obligations. The legislation is far-reaching, and requires that financial institutions located outside the U.S. take action to report to the Internal Revenue Service (IRS) details regarding financial accounts held by U.S. citizens at their financial institution. This legislation is the Foreign Account Tax Compliance Act, or FATCA. Canadian financial institutions appear to be affected by this U.S. law, along with financial institutions around the world, as U.S. citizens living outside of the U.S. are targeted by this legislation.

The new law will require foreign financial institutions (FFIs) to disclose their U.S. account holders' identity and account information by way of entering into an agreement with the IRS. FFIs who decide not to enter into such an agreement will be subject to a 30% withholding tax on all interest and dividends from U.S. sources, as well as on gross proceeds from the disposition of U.S. securities under the U.S. law. The U.S. regulations that implement this legislation were released in final form on January 17, 2013. There is some uncertainty as to how the U.S. would actually enforce these rules for foreign financial institutions that have no connection to the U.S.

In general, FATCA defines a financial institution as an entity which is in the banking business (accepts deposits) or holds financial assets for the account of others, or which engages primarily in the business of investing, reinvesting, or trading in securities, commodities, partnerships or any interests in such positions. The broad definition of FFI includes such entities as banks, broker dealers, custodians, credit unions, insurance companies, hedge funds, mutual funds and private equity funds.

Since these rules were introduced, numerous countries have been in discussions to create an inter-governmental agreement with the IRS. Under such an agreement, financial institutions in those countries will provide "agreed to" information on U.S. account holders to the government of their country, and their government will in turn share this information with the U.S. government. Although the foreign government would enforce "agreed to" U.S. requirements under an agreement, such an agreement can also reduce the reporting burden for FFIs.

The Canadian Department of Finance announced in November 2012 that Canada was in negotiations with the U.S. on an agreement to improve cross-border tax compliance through enhanced information exchange under the Canada-United States Tax Convention. This would include information exchange in support of the provisions of FATCA. As of the date of this publication, there has been no announcement that these negotiations have been concluded.

Canadian financial institutions will need to be familiar with the reporting obligations under FATCA, even where the information is reported to the Canadian government rather than the IRS, in order to ensure that their systems capture the information that will be required to be reported. For example, it has generally been uncommon for Canadian financial institutions to know whether their customers are U.S. citizens (or are otherwise U.S. taxpayers); however, it will be essential to know this information in order to comply with the new reporting rules.

Unless changed by a Canadian agreement with the IRS, Canadian financial institutions that are affected by this legislation should be prepared to gather required information on their customers' accounts which are maintained during 2013 and that are outstanding on December 31, 2013. We will monitor this issue, and provide updates as more information becomes available.

If you think that you will be affected by this U.S. legislation, please contact your BDO advisor for further information.

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