Do I Need a Lawyer To File My Taxes? NO!

You’ve heard the ads and seen the billboards from law firms all over the city promoting themselves as the professionals to use when you need to file multiple years of tax returns. But do you ever think about why you would go to a lawyer instead of Chartered Accountant?

One of the most common marketing lines used by the law firms is that they have privilege, whereas accounting firms do not. However, if you are attempting to catch up on your taxes with the voluntary disclosure program (VDP), then there is no privilege necessary as the VDP requires full disclosure. There is nothing you are hiding from the government that would require a lawyer’s services.

Secondly, it is not only lawyers who can obtain an agent relationship with the government. If you are intimidated by dealing with the CRA yourself, you can fill out a simple form with an accountant that will allow for him or her to be your representative and deal with the government for you. We are able to negotiate payment plans with the CRA and work with the collections agents on your behalf.

Finally, lawyers are not accountants. While the law firms may attempt to discredit the accountants with their advertising, they still use them in order to prepare your tax returns. Is this not contradictory to speak poorly about the very employees who are relied upon to complete the actual tax returns?

Going through tax amnesty program does not require legal services, so spare yourself the large retainer fee and contact Mark Feldstein & Associates Chartered Accountants.

Taxpayers Have Rights!

Many people may not realize that while the Canada Revenue Agency has a lot of power to get you to pay your taxes, you have power too! There is a Taxpayer Bill of Rights that states what your rights are as a taxpayer.

For instance, you have a right to object to a reassessment. If you do not agree with changes made to your personal or corporate return, you can file a Notice of Objection explaining why you object to the changes on the reassessment.

You also have a right to a formal review and appeal. Your final answer is not necessary the first one you get. If you do not agree with the result of the review, apply for an appeal.

If the CRA does make an error that causes you to end up owing interest and penalties, you can apply for Taxpayer Relief which will refund you for interest and penalties paid that arose from a CRA error.

As a taxpayer you also have the right to not pay income taxes that are in dispute until a partial review occurs. However, the interest on the balance owing will still continue to accrue.

If somehow you feel you were not treated in a professional, courteous or fair manner by the CRA, whether it be your auditor, collections officer, etc; there is a formal complaint process in place to deal with these types of matters.

You also have the right to have another individual represent you with matters regarding the CRA. By filling out a simple form, an authorized individual, such as your accountant, we can become your agent and discuss all matters on your behalf with the government.

And finally, the CRA does not get to enter your house without your consent! Many people who are audited assume that when the CRA asks for the audit to take place at their residence that there is no choice in the matter. This is not the case.

To view all fifteen rights included in the Taxpayer Bill of Rights, visit the CRA website at www.cra-arc.gc.ca

First Time Home Buyer Tax Incentives

The government has provided a number of incentives for first-time home buyers. These measures will help offset some of the costs of purchasing your first home and provide you with some of the cash to make a down-payment.

The Home Buyers Plan is a federal government program that allows for you to withdraw penalty-free from your RRSP account. This will give you access to some of your savings without having to pay tax on the withdraw as would normally occur if you pre-maturely withdrew from your RRSP account. Regularly payments are made to repay the amount to your RRSP, but it does allow for you to access additional cash to make your purchase.

There is a First-Time Home Buyers’ Tax Credit available since January 27, 2009 that is a non-refundable credit of $5,000 for home buyers who have acquired their first home. The credit is determined by multiplying the lowest personal income tax rate by $5,000. This credit is non-refundable so the government will not pay you the money if you are already in a refund position, but if you currently owe taxes it will reduce your taxes owing.

If you are purchasing your first home in Ontario, you may also be eligible to receive a refund of part of your Land Transfer Tax. If you have entered into an agreement to purchase a home after December 13, 2007, then the refund is applied for all newly constructed or resale homes. Homes acquired before 2007 are only eligible for the refund on newly constructed homes. However, a condition of this refund is that you have not previously owned a home ANYWHERE in the world, not only Canada.

As well, the home must be used as a primary residence and not as a rental property. The maximum refund is $2,000. The time frame is eighteen months to apply for this refund after the transfer date.

Annual GST/HST Filers Must Beware of Large Payment at Year-End

Although we have transitioned from a 5% Goods & Services Tax (GST) to a 13% Harmonized Sales Tax (HST), the process of instalment payments has not changed. However, the consequences of not paying correct instalments or paying instalments late have substantially increased.

While the threshold to begin owing instalments for GST/HST remains at $3,000, many GST/HST registrants who were not paying instalments in the past may find themselves at the $3,000 threshold with HST and need to begin making instalment payments.

In order to avoid interest charges on GST/HST instalments, one must pay instalments at least in the amount of the prior year GST/HST owing. For example, if you (your company) owed $4,000 in GST last year, and you pay $1,000 in instalments for each quarter this year, then you will not be charged interest for under-paying your instalments. Instalment payments are due within one month after each quarter.

However, by only paying instalments equal to your prior year GST owing, then at the year-end you will owe a lump-sum payment of HST that will represent the additional 8% (from 5% to 13%) of HST you have collected during the year. Therefore the $4,000 in GST you may have paid in a prior year, may balloon to $10,400 of HST in the current year.

Companies who do not plan ahead to leave enough cash on hand to pay the HST collectible to the CRA at this time will find themselves in a difficult situation. It is extremely important to ensure you can make this payment as CRA will begin to charge you interest compounded daily for the outstanding amount. Interest will be charged on overdue balances and/or late or insufficient payment.

Companies may want to set up a separate savings account to collect the GST/HST collectible in order to ensure that the cash is available at year-end. Alternatively, you may choose to increase your instalments throughout the year (current instalment x 2.6 to account for the 8% tax increase) in order to prevent a single large payment from paying only the minimal required instalments.

Home Buyer Plan Conditions

The Home Buyers Plan “HBP” is a Canada Revenue Agency “CRA” tax program that allows for certain individuals to withdraw money from their RRSP without penalty in order to buy or build a home.

In order to be eligible for this program, you must be a first-time home buyer or using the withdrawal to buy or build a home for a disabled related individual.

If you do own the home before the withdrawal, it cannot be for more than 30 days. And if the home is not yet purchased or built, you have until October of the year after the withdrawal to have the home bought or built.

This home MUST be used as a primary residence and NOT a rental property. If the CRA finds that you have withdrawn from your RRSP to purchase a rental property, they will add the withdrawal to your income and you will pay additional taxes as if the HBP were income.

It is not enough to have a pre-authorized mortgage to use the HBP. A written agreement must be in place that details the purchase offer or a contract with a builder or contractor.

Can you be taxed on your wedding gifts?

Your wedding day should be one of the happiest of your life; however it is possible for this event to end up causing you a lot of frustration with the CRA. After your big day, you will likely go to the bank and deposit all of your cheques and cash. What many people neglect to do is to record the guests and amounts, and even photocopy the cheques.

At this point, you may be confused and be wondering what your wedding gifts have to do with the CRA. Firstly, the bank notifies the government when an individual makes a deposit exceeding $10,000. This may make you a target for an audit. If the CRA does decide to audit you, they will consider any unsupported deposits to be income. This means that if you cannot support your wedding gifts, you may end up having to pay tax on them! Undeclared income will also land with you with gross negligence penalties of 50% and compounded daily interest.

This is a situation that no one wants to be in. In order to substantiate your deposits, keep evidence of the guests list, proof of the wedding date (ie. Contract for the venue), make photocopies of the cheques and keep a detailed list of amounts and names for all the gifts received in cash. By supporting your deposits to the CRA, you have proven to them that your wedding gifts are not in fact income and you should not be paying tax on these funds.

It goes without saying that this scenario is true for any event that you may have in your life that results in large deposits. Protect yourself against a future audit and take the time now to support all of your money. If you are currently in this situation and need help through your audit, please do not hesitate to give our office a call.

The Importance of a Paper Trail

Cash is ubiquitous. We use it everyday, everywhere. Despite what some people may think, the government does not care if you pay for your purchase or receive payment with cash or credit as long as you have evidence to record the transaction.

Missing documentation for cash transactions may cause some of your expenses to be disallowed on the basis that there is no proof that the expense is related to your business. Without receipts, Canada Revenue Agency (CRA) may consider your cash expenses as personal and disallow them.

If some of your expenses are disallowed, your taxable income will be increased and you may end up owing more taxes that necessary.

As well, the CRA does not always consider credit card statements as evidence. For example, if you are using your credit card to support gas purchases, it is possible that the CRA may not accept the statements because the purchases at the station could be for lottery tickets, snack food, etc.

Alternatively, if you deposit cash in your bank account without having supporting documentation, the government has no way to verify that the money deposited is not undeclared income. If you end up being audited by the CRA, you may find that you will owe income taxes for money that was never earned as income. For instance, if you have casino winnings or receive a lump sum or cash from a relative that you deposit into your bank without having evidence, this cash very easily can be considered income by the CRA. Ensure that all of your cash transactions have proper support.

As well, if you are choosing to partake in cash transactions, GST/HST must be paid or collected when applicable. If you are a GST registrant and collecting cash on your good or service, the method of collection does not change the need to collect GST/HST and remit it to the government. If you are paying for a good or service to a GST/HST registered vendor then you need to pay the GST/HST in order to be able to claim the input tax credits on the expense.

Finally, many people are not aware that the bank and the CRA have any relationship. If you make a cash deposit exceeding $10,000 your bank will notify the CRA.

If you have engaged in cash transactions that have resulted in misrepresented personal or corporate tax returns, you need to correct these returns before you find yourself in serious trouble with the CRA for failure to report income or for claiming personal expenditures as business. It is possible to file a Voluntary Disclosure that will allow for you to come clean with the CRA and waive any criminal prosecution. Contact Mark Feldstein & Associates Chartered Accountants for a free consultation if this sounds like a situation you are in.

Tax Free Savings Accounts

On June 1st 2010 the CRA mailed out Tax-Free Savings Account (TFSA) over-contribution letters to many Canadians. Although the program is still relatively new, it has already resulted in confusion for many investors.

Contribution to the account is limited to $5,000 a year. Any income or gain earned on the investment is tax-free. Any unused amount will carry forward to the following year for future contribution. However, withdrawn amounts do not result in excess contribution room until the following year.

For example, if you are to contribute $5,000 in February and withdraw it in September, you cannot put $5,000 in your TFSA again until the subsequent calendar year. By contributing $5,000 to your account again in the same year, you are inadvertently over-contributing to your TFSA.

In order to deter investors from over-contributing, and therefore earning additional tax-free capital gains and income, the government has put penalties in place for these over-contributions.

For minor, likely accidental over-contributions the penalty stands at 1% per month of the over-contribution for each month that the TFSA is in an over-contribution position. Unlike the RRSP, there is no ‘grace amount’ that allows for excess contribution to remain in the account without penalty tax.

The CRA realized that investors were deliberately over-contributing as they were able to earn returns on their investments that exceeded the 1% penalty. Therefore, when an investor deliberately over-contributes to his or her TFSA, the penalty increases to 100% of the capital gain or income earned.

If you have accidentally over-contributed to your TFSA, options exist for you to take action against the CRA and potentially avoid paying the over-contribution penalty as the CRA can waive the 1% penalty on a case-by-case basis. If you are in this situation, contact Mark Feldstein & Associates Chartered Accountants to help you resolve your TFSA penalty tax.

Capital Gains Tax on Real Estate

Owning a rental property is a common real estate investment. Many times, people convert their home into a rental property or a rental property into a primary residence. The change of a property from a primary residence to a rental property, or the other way around, is considered a change in use of property. You are deemed by the government to have sold your property at the fair market value and immediately re-acquire it for the same price. This means that you are required to report the capital gain or loss on the sale that year.

While primary residences are exempt from paying tax on the capital gains relating to the sale of the residence, the years a property was used for rental purposes are not exempt. It is a common mistake for many property owners to not realize the importance of their decision to convert a property’s use. Failure to report a capital gain that arises from the change of use of property is equivalent to failing to report income.

When the CRA realizes that you have failed to report the capital gain on your property, you will be subject to daily compound interest on the unpaid tax from the time the transaction occurred until the present. You may also be responsible for penalties of 10% each for provincial and federal for the unreported amount. The greater value your home has increased from the date of purchase to the date of change in use, the greater the taxes, interest and penalties that will result.

If no enforcement action has currently been taken against you, there is still an opportunity for you to come clean with the government and avoid paying the penalties on the unreported capital gain with the CRA’s Voluntary Disclosure Program. At Mark Feldstein & Associates Chartered Accountants, we help our clients through this process on a regular basis and we can help you too.

For more information visit http://www.fightbacktoday.ca.

Is a Hobby Business a Real Business?

The answer to this question in most cases is yes.

Many people have hobbies such as selling homemade desserts or teaching piano to neighbourhood kids. However, people may not realize that they may actually be running a small business. The CRA considers a business to be an activity that was undertaken with the intention to earn a profit. This means that the income earned from selling your goods or providing your service is taxable business income.

For example, if someone starts selling jewellery they have been making at home to their co-workers, friends, etc, to earn a little extra income, that money collected is taxable. Just because it may not be a primary source of income, doesn’t mean that you didn’t earn it and don’t need to pay tax on it.

However, having your hobby be considered a business is not necessarily a bad thing. Although you are declaring the income you earned, you can also deduct the expenses incurred in order to collect that income. For the jewellery seller, any costs to purchase the beads and strings become business expenses and can be deducted on your tax return.

There are several other advantages to having your hobby become a small business besides just deducting the materials that went into producing your inventory. If you have a room in your home as your ‘home office’ that is your primarily place to do business or you are regularly meeting customers there, then you are also able to deduct some home maintenance costs such as utilities, property tax, home insurance and mortgage interest based on the percentage of space that the home office occupies of the entire home.

If the space is used for both business and personal use, the CRA asks you to make a reasonable estimate using hours of the day. So if you are using that space for business four hours a day, then the percentage of expenses that you could claim would be 4/24, which is 16.67%.

A small catch regarding the home office expenses is that you cannot use the home office expenses to create or increase a loss. This means that your use-of-home expenses cannot exceed your business income. The government does not want everyone to create losses with their home office expenses and then use the losses up in future tax years.

The CRA is also alert to people who want to falsely report a business in order to claim personal expenses; an isolated transaction does not count as a business. A person cannot sell a pet rock, for example, to a friend, and then consider it a business and deduct a ton of expenses. In order to ensure that the small businesses are legitimate, evidence of intention is required. This means there is evidence that you are intending to earn a profit.

So if you are frequently selling items on e-bay or making corporate gift baskets you need to consider whether your hobby is a business. By neglecting to report this money on your tax return, you are guilty of failing to report all of your income and can end up in serious trouble with the government. This can result in a penalty of 10% of the unreported amount and interest due on any taxes owing.

Or, if you have claimed personal expenses until the pretence that you are operating a business, you have filed a false statement and will be sentenced with a penalty of 50% of the tax related to your false statement.

Be proactive and determine if your hobby is a business (or not) and if think you have unreported income or have falsely claimed expenses, talk to your accountant to discuss your options.

What Tax Credits Are Students Eligible For?

Students are eligible for so many different tax credits. If you are a post-secondary student and you live in residence there is a $25 tax credit you can claim. Once you move off campus, have your landlord write a memo or provide you with a lease confirming your rental address and that your rent has been paid. You have also prove your rental payment by requesting a receipt or by paying by cheque and keeping a copy of the cancelled cheque, you will be able to claim your student housing rent.

There is also a credit available for both part-time and full-time students for tuition, education and textbooks. Your institution should provide you with a T2202A or a receipt that should be provided to your accountant in order to apply this credit. If you do not have enough taxable income to fully utilize the credit, it can be transferred to a parent or carried forward for a future tax year.

If you are a student in debt, you may be able to claim the interest on your student loan. Only you as a student can make this claim, although someone else may have paid the interest on the loan. In order to qualify, the loan must come from a legitimate source such as the Canada Student Loans Program and cannot be a personal loan (e.g. from a family member) or a line of credit. Keep in mind, if you fail to pay back the loan, you CANNOT claim the interest paid!

One last tax option is to claim moving expenses if you are relocating over 40 kilometers for work or to pursue post-secondary education. So, if you are graduating university in London, Ontario and manage to find yourself with a new job in Ottawa, you are able to claim some of the expenses related to the move. Deductible expenses include transportation and storage costs, cancelling a lease at your old residence, meals and accommodations for up to 15 days at $51 a day, and travel costs such as for your vehicle.

Moral of the story: If you are a student looking to add a little to your tax refund, keep your receipts for the topics mentioned above and ask your accountant if you are eligible for them.

For more information on these credits visit http://www.markfeldstein.ca

Mark Feldstein and Associates Chartered Accountants Release - Introducing Sara Feldstein

Mark Feldstein and Associates Chartered Accountants, is pleased to announce that Sara Feldstein has joined the firm, as of May 26, 2010. Sara represents the third generation of a long family legacy of successful chartered accountants that include her grandfather, founder of Feldstein and Associates and her father Mark Feldstein, Chartered Accountant and principal of Mark Feldstein and Associates Chartered Accountants.

Sara is accomplished in her own right with an impeccable academic record. Sara brings high level experience having worked with established corporate clients during her tenure in a large Toronto Accounting firm composed of more than 14 partners. Sara brings incredible energy and strong analytical skills to the tax team at Mark Feldstein and Associates.

We are very pleased to welcome this outstanding accountant to the firm we look forward to Sara’s continued success and contributions to the firm in years to come.