Tax Season Trials and Tribulations: How to Avoid Them and Make the Most of Your 2013 Tax Return

By George Dube

It?s that time of year again: time to cast your thoughts back to 2013. Are you ready to get your personal taxes completed on time for the personal tax deadlines? Are you sure that you are getting all possible deductions that are reasonable? Do you understand the implications for capital cost allowance (CCA), repairs vs capital, condo special assessments, and more? Let?s review these hot topics at this time of year, and look ahead to 2014.

Year-in-Review ? What Happened to You and Your Investments in 2013?

Do you remember how little you remember about 2013? What expenses did you have and what did that cash spent relate to? Here are some recommendations on where to start getting ready for your 2013 tax return:

• Review last year?s tax returns for items that are likely applicable this year

• Review your notes from your last planning meeting with your accountant for new items

• Review the personal tax checklists on our website (www.dubecuttini.com) for new deductions, changes to your business that provide opportunities for new deductions, or to see if there are additional points you haven’t thought of before. We have checklists of common deductions for real estate investments, automobile expenses (For instance, Do you pay tax on a car allowance? If yes, then this checklist might prove to be helpful), home office expenses, business/investment deductions, and general items.

• Make a promise to yourself after you organize your 2013 information to stay organized in 2014, and beyond. The same thing will happen next year, unless you organize yourself better now. Something that is bound to help is a receipt scanner from somewhere like hereon.biz, which helps you keep track of your manual expenses. This can be one of the biggest challenges when it comes to filing an accurate tax return.

To CCA or not to CCA? That is the question.

Tax season brings many questions from our clients about CCA. Taking depreciation on a property, or capital cost allowance (CCA) in tax terminology, allows you to shelter taxable income from immediate taxes. Ultimately, these taxes will likely be repaid when the property is disposed of as part of ?recapture?. Generally though, when you sell a property, money is available to pay taxes as compared to through the years of ownership when money may be harder to come by. So, in effect, often the question should be rephrased to ask, ?Would you like an interest free loan from the government for a number of years or not??

Are there exceptions? Absolutely. If a property may be used as your principal residence, which can ultimately be disposed of tax free, claiming CCA typically removes this possibility of receiving the proceeds tax free. Or, in a particular year you may have a lower income so it doesn?t make sense to claim CCA. Instead you can save it for higher income years.

Repairs vs. capital expenditures?deductions now or over time?

Each year we have discussions with our clients about what they can or can?t claim as repairs, which they can deduct immediately, and capital expenditures, which are deducted over a long period of time. While admittedly more of an art than a science, we need to consider:

• Is this something that has an enduring benefit to the property?

• Is it to maintain or better the property?

• Is it integral to the property or a separate asset?

• What is its relative value compared to the total value of the property?

• Is the expenditure incurred during the first year or the year of sale?

All of these factors go into helping decide whether you can claim the expense, or have to capitalize it over many years, thus potentially taking CCA over many years.

Provided the expenditures were not in the first or last year of ownership, replacing a roof or windows, for example, tends to be repairs in my opinion, whereas adding a room or finishing a basement is capital in my mind. Things like structural repairs that require the expertise of Foundation Repair Milwaukee
companies or ones in the property’s vicinity, may need to be considered carefully depending on the duration and cost of the project. Moreover, overall and relative value of the project to the value of the house can also become a factor in the decision-making process. Refinishing bathrooms and kitchens tend to be areas where we look for more specific details before judging.

Condo special assessments?anything special about the tax treatment?

You have discovered that your condo corporation has approved a special assessment for your investment units. Essentially, additional funds need to be raised beyond what the normal monthly condo fees will cover. How do you account for these costs at tax time?

Fortunately, in many cases, the amounts are simply deducted as they are incurred. Essentially, you have to determine what the purpose of the special assessment is to see whether you can expense or capitalize the amount. For example, if the assessment relates to installing a new pool and fitness centre, you will capitalize the amounts. Whereas repairing common areas or landscaping would typically be expensed.

2013 Tax Changes? Any Changes to be Aware Of?
2013 was a quiet year for tax changes from a legislative perspective, although I am concerned with some trends in audits, as well as trends in gathering (excessive) information from taxpayers.

A quick review of two items announced this year:

International: Reporting your foreign investments became a little more cumbersome, with more details being requested. For those with stock portfolios in addition to real estate, this may prove a nightmare. Rules are stricter now with respect to how much interest may be deducted unless certain debt ratios are met (restricting the leverage that can be used in different cases where a foreigner owns Canadian assets). They have also opened a ?snitch? line for larger international investors. Unfortunately the government seems to be positioning international investors as tax cheats, even when they follow the rules. Stretching the time during which you can be audited is another frustrating addition to their arsenal.

Dividends: Tax authorities have clamped down by effectively raising the taxes owing on dividends paid by small companies to personal shareholders. While not a huge change, it does take a little more out of our pockets. Fortunately this begins in 2014, so enjoy it while it lasts.

Get Online Now? Before Your Tax Deadline

CRA is providing access to more and more services online, and it?s a good idea for you to set up online access to your account right now as the process takes some time. Once you are registered for your personal and/or business accounts, you can authorize other people on your accounts, find notices of assessment, make requests, and make payments. To login or register, go to: http://www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/menu-eng.html

Many of our clients use this service, as do we, but find out too late that if they want to make an online payment on April 30^th, and haven?t set it up ahead of time, they are out of luck. (Another tip: Banks have daily limits for online payments. If you have a large tax bill you may need to spread the payments over a few days if you?re going to do this online.)

Tackling 2014?starting thinking about it now

Start planning with your accountant?but after March and April please. (And, if they have lots of time in tax season, should you be working with them?) We and other advisors appreciate your understanding. When you need the time, we?re there to help you answer the question: ?What is my plan?? It should integrate and develop your financial, business, family, health, spiritual, fun, and personal sides. Life is exceptionally short compared to eternity. Do your best to ensure that what you do now gets you to where you want to be.

Tax Deadlines

Due Date	Filing and tax payment requirements
February 28	T4 and T5 slips must be filed. T5018 ? statement of contract payments must be filed. (e.g. If running a ?construction? business in which you pay subcontractors)
March 31	Trust returns must be filed. Partnership returns must be filed.
April 30	Personal tax returns (T1) must be filed. Taxes owing must be paid.
June 15	Personal tax returns for those with a business (sole proprietorship or partnership) must be filed. Taxes owing, however were due on April 30, so we recommend completing the tax return in April.

George E. Dube, CPA, CA, LPA is a veteran real estate investor and accountant (CPA). He has spoken, written various articles, and co-authored two books on real estate accounting. Reach George at georgedube@dubecuttini.com.