As the 2010 personal tax season draws to a close, I can start to reflect and comment on a few of the items that came across my desk this year.
The item that had the most impact on a number of taxpayers was the conversion of the Real Estate Investment Trust units, or REITs as they are called by the industry.
This year the REITs were required to incorporate, which closed a tax loop hole that appeared with this kind of investment.
The result was investors were required to sell their REIT units and purchase corporate units.
As we all know, when you sell an investment that has appreciated over time, you may be and most were, subject to capital gains.
If you had capital losses in previous years, such as from 2008, you could have used these losses to offset the gains.
Most people found it more beneficial to have the tax savings from a capital loss realized immediately, so any capital losses were usually applied back to the previous year’s gains.
A second issue with the REITS pertains to the distribution of earnings.
Instead of distributing that income back to you by way of dividends or interest, it was distributed back to you as a return of capital, which in effect reduced your original investment.
So when you sold the investment, you may have experienced a larger capital gain than you would have if you had invested in something else.
The onus was put onto the investor to keep track of how much they had received by way of return of capital so that the correct capital gain would be reported on the sale of the investment.
Those people who thought they didn’t need to do this and didn’t provide these numbers for their accountants can probably look forward to a reassessment of the values to a higher capital gain down the road.
With the use of the computer systems, the CRA is probably figuring out a way to check those capital gain calculations as I write this column.
Now that the subject has moved over to computer systems, I also had a few cases where people came into the office not satisfied with bills that they had received from other accounting firms.
It always amazes me how firms are able to charge a client a bill that, in my opinion, would mean that the entire tax return had been done manually instead of using a computer program.
The slogan that comes to mind for me is ‘buyer beware.’ On the other hand, some people hate change so much that they will continue to pay an ever increasing bill just so they never need to make a change.
Then there is the client that expects you to bend over backwards for them to complete and efile their tax return on time and then balks at the extra charges put on the bill for the extra effort, leaves the office without paying the bill, or asks for payment terms when the work has been completed.
My question to them is this : “Do you leave a restaurant without paying, too?”
The final item on the investment front is that many people are invested in the safe interest income or other income investments, which contributed to an increase in personal taxes payable this year.
Surely your financial planner should be able to help you find some safer tax savings or tax neutral investments?
Some married and common law couples choose to file separately.
When we get that request, I let them know that they will lose any non refundable tax credits that they may have been able to transfer or optimize between them, an obvious one being a medical expense deduction of all medical receipts for the lower income earning spouse.
When we receive information for a tax return, we usually spend a lot of time putting the documents in order to easily and efficiently enter them into the tax software.
If you are wondering what this order might be, every office is different so check with your accounting office.
Once we get it in order and scanned, then we enter it into the software at which point we need to consider over 456 items before we come out with a final product that is your tax return.
This is the reason why software programs are so popular because it would be very easy to miss something when calculating manually.
Keep in mind that the small business owners/subcontractors needed to pay any taxes owing to the CRA by April 30 and file their personal returns (including spouses) by June 15.
Gabriele Banka is a Certified General Accountant and the owner of Banka & Company Inc.