Tax season is fast approaching. Do you have your ducks in a row? To be more specific, do you have records of stock investments – or re-investments that you made years ago? Many Canadian investors have the same problem: they’ve lost trading records and now can’t figure out their adjusted cost base (ACB), which makes it very hard to accurately calculate capital gains for tax purposes. However, it is not a good idea to “guesstiimate” it because the Canadian Revenue Agency requires you to justify it, and, if you can’t, they may reassess your return and could charge you interest or penalties.
You are required to maintain records to establish your tax liability. If you no longer have them, a good starting point is to get information from the financial institutions with whom you invested. For example, discount brokers make transaction records available for free on their websites. But, beware. Their records may only go back a few years. For older records, you may end up paying a research fee ranging from $40 to $200, one discount broker stated. If you have the original stock purchase records, but can’t document later dividend re-investments, Weinstein advises, you can establish the ACB as equal to the value of your original purchase. Weinstein recommends that this approach is better than claiming an ACB of zero. Another option is to gather the data you have and create a spreadsheet to figure out the how the money was reinvested when your shares were in a specific plan. The best option is to keep transaction records so you won’t be stressed out next tax season, Heinzl advises.
“As tempting as it might be to “fudge the numbers” and come up with a guesstimate of the ACB, this is not recommended.“
If you are unsure about how certain tax with holdings may work for your work situation, asking the CRA directly may not be your best option. A recent case involving a truck driver who was told incorrectly that he did not have to pay and HST taxes by a CRA agent. When the case went to court, the judge decided against the driver. Although the courts do not allow relief from taxes owed in cases like this, tax payers can seek to have any penalties and interest waved in these situations.
“While it may be shocking and perhaps even unfair to taxpayers that the CRA can provide incorrect tax advice to taxpayers and then reassess them later for having acted on said advice to their detriment, the tax court’s reasons for refusing to grant relief in this case is obvious. The CRA gets tax law wrong all too often.”
Many people have been able to finally get through the phone lines to Canada’s Revenue Agency, however, the wait times are very lengthy. Once they get the chance to speak to an agent, many callers do not even get the correct information they need and so means they likely have to go through the long wait again to make another call and get things straightened out. Another system created to help still needs major upgrades and workers who are more informed and experienced to handle calls quickly and effectively.
“While more are getting through to an agent, the wait time are longer.”
For many, the thought of a tax audit is quite stressful, and when an audit does happen it’s often because the tax agency had questions about a return that needed answers. Deductions, such as for expenses for jobs or changing residences, are a key source of these types of questions; though they’re not the only reason for an audit. Issues with donations listed on a return, as well as educational credits or business deductions can often lead to questions. To be more assured about your return, make certain what you claim on it is fully and clearly supported by the tax regulations.
“The fact is, employees are not allowed many deductions, so it shouldn’t be surprising that the taxman focuses time here.”
Canadian tax filers will see the newly redesigned tax form for the 2019 tax year. The Personal Income Tax form, the T1, has been revised significantly by the Canada Revenue Agency. Instructions and questions have been altered to use more straightforward wording and language, pages have been added to accommodate the worksheet used for figuring your federal tax, and the overall form has been brought up to modern standards. The filing deadline for 2019 tax returns is April 30, 2020, so be sure to take a look at the new T1 before you complete and file it.
“As the Canada Revenue Agency put it, “Your income tax package has a new look.” No kidding! Some of the changes include the use of plain language, where possible, an increased font size and more white space.”
While taxes are due by April 30th, every year some of the regulations that apply to taxes change, and this year is no exception. Be aware of the deadline for RRSP filing has been bumped to March 2nd; missing it means missing out on using it for your 2019 return. Early filers can begin submitting returns on the February 24th, if you have all your documents. And be sure you’ve reviewed new deductions that are available, such as the Climate Action Incentive available to those filing in Alberta.
“As usual, April 30 is the date most Canadians need to keep in mind. For the majority of tax filers, this is the deadline to both pay any tax due and file returns.”
Canadian citizens having earned income and have a social security number and have filed a tax return may contribute funds into a Registered Retirement Savings Plan(RRSP) to reduce the amount of income taxes paid. This can be done each year until the individual’s spouse reaches the age of 71. RRSPs can be opened in financial institutions or banks registered by the Canadian government. The savings placed in these accounts are tax deductible as long as they remain in the account. The maximum amount that could be contributed for the 2019 tax season is $26,500. This amount will be increased to $27,230 for the 2020 tax year. The deadline for making contributions is 60 days following the end of the tax. These contributions can be made in cash as well as stock or security holdings.
“If you’re like many Canadians, you’re hoping you’ve paid enough tax in 2019 and may even be looking forward to a hefty tax refund. You can help ensure that happens by knowing the details of your Registered Retirement Savings Plan (RRSP), what sets them apart, your contribution limit and a whole slew of other things.”
It is readily apparent to those in the financial sphere that RRSPs cause consternation to many, with a fair amount electing to not contribute to them, calling them a waste of time and effort. However, at least one financier has to note that the decision is not one that should be written in stone in his opinion. Rather, it is dependent on the situation of each possible contributor. There is, for example, one quite logical reason why older single, seniors might elect to stop contributions. In such a case, upon the death of the person holding the RRSP, a widow, or widower, for example, taxes take a phenomenal bite out of the remaining RRSP balance. Another example where contributing to a TFSA could be a better choice is when a contributor is currently working at a low-paying job, but has expectations of an improved income within a few years time. It is more sensible, given such a scenario, to await the higher earnings before switching to an RRSP. If the reverse is actually the case, it can be most beneficial to contribute to the RRSP now and remove earnings when the income does the anticipated and drops. In the case of couples with a significant age gap, it is important to understand how much income is taxable in the case of each spouse. With care, it is possible to skew the benefits inherent in such a situation as required for the benefit of each spouse.
“While you will be taxed on these withdrawals as income, if the tax rate is very low because you have little other income, it usually makes sense to withdraw the money in those years and put it back when your income is much higher.”
Having a RRSP account can be beneficial but be warned the CRA monitors these accounts looking for mistakes that will cost you a good chunk of your retirement savings. You should try to avoid early withdrawals. You will get hit with a tax bill on previously tax sheltered income as well as lose the contribution room in the account needed for future investments.
“Aside from the tax due, you incur other costs because of early withdrawals. You lose the tax-sheltered compounding effect.”
No matter who you are, when it comes to tax time you will try to save hold onto as much of your hard earned money as you can. You’ll want to choose your accountant wisely to ensure you hire the right one. Tax evasion, knowingly under reporting income or faking deductions is illegal. Tax avoidance can be used but can quickly turn into tax evasion if your accountant advises you on the wrong strategies. The final test is who you’ll want on your side if you ever get audited.
“It’s no surprise that taxpayers would generally like to minimize the amount of taxes owing. Over and over again courts have said that there is nothing sinister in so arranging one’s affairs so as to keep taxes as low as possible. Everybody does it, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands.“