Dentists and Taxes

When we think of dentists and we think of taxes, we usually consider the medical expenses incurred at the dentist to claim on our personal tax returns.

However, in 2010 the Canada Revenue Agency has made some changes to the medical expense tax credit. Procedures that are purely cosmetic are now ineligible to be claimed as medical expenses.

For instance, your decision to whiten your teeth will no longer provide a tax credit but your root canal extraction will. If the expense is for medical or reconstructive purposes, then the expense will still qualify.

Another change to the dental industry is the decision by the government in the 2010 Budget to have GST/HST be charged on the cosmetic procedures. So now not only will your cosmetic treatments not get you a tax credit, you will also be paying 13% GST/HST on top of the cost.

The rationale is that cosmetic procedures are not basic health care and therefore are subject to tax. For details on which specific procedures qualify, visit the CRA website at www.cra-arc.gc.ca.

Charity Scandals 101

Time and time again, clients walk into our offices because of their involvement in a charity scandal. Although there are many variations of these schemes, the most popular one is as follows:

Mr. Doe wants to increase his tax refund. His accountant suggests that he makes a contribution to a charity to help him decrease his taxes by increasing his donation credit. Mr. Doe then receives a donation receipt for a far greater amount than the actual cash outlay. Mr. Doe’s accountant then proceeds to record the inflated donation on Mr. Doe’s tax return. Then Mr. Doe finds himself in trouble with the government, and his accountant has disappeared.

It is not common practice for your accountant to ask you for money that he will donate on your behalf to a charity. If your accountant suggests this to you, you may want to look for a different accountant. If he/she claims to have a professional designation, contact their related institute to determine if they are in good standing and have not lost any type of licence.

When you do want to make a legitimate donation, investigate the charity first. The CRA website has a list of all authorized charities, as well as charities that have lost their statuses.

Charity receipts are required by Canada Revenue Agency to include specific information about their organization, including, the following: Statement that it is an official receipt for income tax purposes, charity’s registration number, name and address of the charity, serial number of the receipt, place receipt issued, day/year of donation, full name of donor, amount of the donation, the eligible amount of the donation, a signature of an individual authorized with the CRA from the charity, and the CRA website address.

Make sure that the amount on the donation receipt matches the donation you have made. If you make your donation with a cheque, keep the cancelled cheque so that you have proof of payment in case any CRA enquiries arise.

If you have contributed tangible goods to a charity, do not record the goods on your return as a donation and a capital gain. When this is done, it appears that you have both received funds and donated the same goods.

If the government discovers that you have participated in one of these scandals, they will likely revise your tax return to reflect the actual cash outlay of the donation. If this puts you into a tax owing position, interest and penalties will be applied to the balance from May 1^st of the tax year that this occurred.

It can take many years for the CRA to look into charity scandals and it is quite common for returns from 2002, 2003, etc to be looked at now. This means that 8+ years of daily compounding interest and penalties that apply can easily end up doubling the tax debt.

Protect yourself and do not involve yourself in these type of schemes. It may appear to save you some money now, but the consequences when you are caught are just not worth it. It is in your best interest to make a donation to a registered charity and take the donation credit you deserve.

RRSP Deadline Fast Approaching

It’s that time of year again when we all start to think about taxes. How much money did I make this year? How much tax do I have to pay? Will I ever be able to afford to retire?

The most popular savings options for Canadians is the Registered Retirement Savings Plan (RRSP). This plan allows for one to receive a tax deduction equal to the amount of the contribution.

For example, a $20,000.00 contribution to your RRSP account will allow for a $20,000 deduction from the total income calculated on your tax return.

The concept is that you will be making less money when you retire and therefore will choose to pay the tax on the contribution when you collapse your RRSP in retirement, instead of paying the tax now at a presumably higher tax bracket.

The CRA adjusts the contribution limit of the RRSP annually. The 2010 contribution limit is $22,000. In order to ‘earn’ room to contribute to your RRSP you must be earning an income.

If you earned $50,000 last year, the government will multiply your prior year earned income by 18% to determine your contribution room. $50,000 x 18%= $9,000.00. Any unused room can be carried forward and used in future tax years.

The CRA considers earned income to include employment income, self-employed income, rental income, taxable support payments, CPP or provincial disability income, etc.

Dividend and interest income do not count as earned income and therefore do not contribute to your earned income, unless they are an active part of your business. This is especially important for shareholders who want to contribute to their RRSP but pay themselves with a dividend and not a salary each year.

Another option to reduce taxes using your RRSP is to contribute to your spouse or common-law partners RRSP account. However, keep in mind that this will reduce YOUR deduction limit.

RRSP’s are a flexible way to save for retirement, but they may not be for everyone. For instance, if you know that in the near future you will need a larger some of cash to invest in a business, you may want to stay more liquid and decide to invest less in your RRSP this year. As well, if you are already in a low tax rate, you may decide to wait until you are in a higher bracket to begin deferring any taxes.

The important idea to take away from this is that RRSPs can be a beneficial and structured way to plan for your retirement, but they are not for everyone. There is still a month left to make a contribution for your 2010 tax return (March 1, 2011). So please take the time to consider your current cash and retirement needs to decide if the RRSP is a good retirement strategy for you.

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.