5 Income Tax Tips from the Trenches
It is the time of year when many accountants and tax preparers live, breathe, eat and sleep taxes (leaving very little time to write about them!). And while much of it is routine, there are numerous issues that arise, the treatment for which is not immediately apparent and can actually be quite interesting (perhaps more so to a tax nerd), some of which are compiled below:
Income from a part time or hobby business
I frequently get calls from small business owners who have not declared income from “hobby or part time businesses”. Note that any income earned during the year regardless of the type of enterprise, must be reported. Reasonable and relevant expenses should of course be deducted and if you are in the startup phase of your business, you might actually have a net loss, which unincorporated business owners canoffset against other sources of income. There is also some confusion about being a small supplier, who earns less than $30k, which specifically relates to a small business owner’s obligation to register for GST-HST-QST and is completely distinct from income taxes.
Foreign Property Reporting – Form T1135
Revenue Canada has been vigilantly targeting individuals who don’t report specified foreign property exceeding $100k . Even individuals who have reported their foreign property have been subject to fines of up to $2,500 if their returns are not filed on time. This is particularly frustrating and unfairly punitive for taxpayers who delay filing of their returns as they might be expecting a refund. There is however a glimmer of hope whereby the tax court of Canada cancelled the penalty for late filing of the T1135 and “held that even strict penalties should not be applied if a taxpayer has taken all reasonable measures to comply with the legislation.”
Note that if the value of the specified foreign property exceeded $100k at any time during the year, it must be reported. Specified foreign property includes foreign rental property, bank accounts, shares and debt but exclude personal use property (eg. a vacation property that does not generate rental income) and US individual retirement accounts.
Full list of included and excluded property and other CRA frequently asked questions about the T1135
Child Care Expenses
Taxpayers with children do get significant relief both in the form tax benefit payments and expenses that can be deducted, including day care, nursery, day camp, boarding school, camp. One point of interest is that taxpayers may deduct payments to babysitters, which include a nanny, taxpayer’s sister or grandparents (not parents, unfortunately). In Quebec, there is a refundable credit for child care expenses of up to 60% of the expense as long as it does not exceed $9k for children born after 2006 and $4k for children born after 1996.
Also note that the federal child care deduction applies to the lower income earner only to the extent of 2/3rds of their net income (as such a family where one spouse with no income will not be able to take advantage of the deduction). As such, small business owners should consider splitting their income (where appropriate) to take full advantage of the deduction.
If you moved during the year, and your new residence is at least 40kms closer to your place of employment, you are entitled to deduct moving expenses. This applies to regular moving costs (amounts paid to movers etc.) and also includes incidental costs eg. Amounts incurred to sell your house including broker fees and mortgage penalties. Although the deduction is limited to the amount that you earned from your employment from the date of the move onwards, it can be carried forward to the following year.
Filing your tax return even if you don’t have any income
While taxpayers who have not earned any income during the year (and do not have any other taxable transactions like disposition of property etc.) are not required to file income tax returns, it might be beneficial to file an income tax return to receive the GST/HST credit and child tax benefits. In Quebec taxpayers are also entitled to the solidarity tax credit (as long as they sign up for direct deposit) which can exceed an annual amount of $1,000 for each spouse if you rent or own your dwelling. Finally, students should be reporting tuition fees paid and student loan interest as this can be carried forward and applied to future year’s income (which can be very welcome, particularly when you are first starting out and are slightly shocked at the size of your paycheque.)
The tax codes (federal and Quebec) allow for a myriad of deductions and expenses, some of which are less well known . If you are in doubt about the potential tax implications of an expense (or income) you should consult with an accountant or use the internet to gain some clarity on the issue.