Mark Your Calendar: Critical Deadlines for May and June

Tax season never truly ends, it seems, as there are many more upcoming tax filing, investment planning and education milestones to discuss with your clients over the next six months. Check out our handy checklist below and then test yourself – what are the conversation openers you’ll use and with which clients? It’s your opportunity to shine with every member of the household:

By Evelyn Jacks How do you survive a tax audit? Do you have any rights when you receive an unannounced visit by an authorized person from the tax department? In fact, you do but know that co-operation with a tax audit is required under the Income Tax Act. Every person carrying on a business and required to pay or collect amounts under the Income Tax Act must keep records and books of account containing enough information to enable the amounts to be paid to be determined. You must keep this information until six years after the end of the taxation year to which those records relate. If you have failed to deliver up the records in response to an audit request, the Income Tax Act gives the tax department the authority to search premises and seize records. You are allowed to retain copies of the seized documents and the tax department must provide allowed access for you and your representatives to inspect the seized documents as required at all reasonable times during normal office hours. While surprise visits at your home by a tax auditor are unusual (a letter requesting certain files for inspection is more routine), an authorized person employed by CRA may "Öat all reasonable times, for any purpose related to the administration or enforcement of this Act: inspect, audit or examine the books and records of a taxpayer examine property in an inventory of a taxpayer" Under these powers, the CRA is also authorized to enter into any premises where any business is carried on, property is kept or any other activities are undertaken in connection with the business or property, or books or records, and to require that the owner or manager provide reasonable assistance and answer all proper questions. If you have a home-based business, this includes your home. The taxpayer does have certain rights including the right to see a written request for information (you should request this before you allow entry to your premises) and a list of issues to be answered. The tax auditor may not enter your dwelling without your consent unless a search warrant is produced. In addition, you should know that third parties approached by the tax department are not required to provide information or documents related to business dealings with you or other unnamed persons or third parties unless authorization has been given by a judge to obtain this information. You should also be aware there is significant co-operation between jurisdictions and also tax treaties that govern how you are taxed when you reside in more than one country. A taxpayer who is being investigated by audit is entitled to be present and to be represented by counsel throughout the inquiry unless it is ordered otherwise. (The tax department would have to show that your presence would jeopardize the process in that case.) Likewise, those who act as witnesses, providing evidence in an inquiry, may be represented by counsel. But forget about taking the tax auditor on in a duel . . . no taxpayer is allowed to physically or otherwise interfere with, hinder or molest an official of CRA (!). Evelyn Jacks is the author of Essential Tax Facts and Master Your Taxes and President of The Knowledge Bureau, knowledgebureau.com.

Registered retirement income funds or RRIFs and the requirement to withdraw certain minimums from them every year, are also of particular concern to many retirees given the current market conditions. No one wants to be generating losses because of the financial meltdown if they can afford to wait it out. The RRIF withdrawal rules do not provide for such an option. In view of this, the Government is proposing RRIF annuitants be allowed to reduce their minimum withdrawal by 25% for the 2008 tax year. For example, if an individual would be required to make a $20,000 withdrawal under the current rules then that minimum amount would be reduced to $15,000 under the new rules. Taxpayers who have already withdrawn more than the reduced minimum amount would be allowed to re-contribute the excess amount (up to $5,000 in this example) back into the RRIF. The deadline for recontribution is the later of March 29, 2009 and 30 days after the proposed legislation is passed. Taxpayers making these recontributions will be allowed to claim a deduction for the amount recontributed on their 2008 returns. Therefore significant milestones for the month of March 2009 are the following: March 2 Age eligible taxpayers with unused RRSP contribution room may make contributions to that plan. March 15 Quarterly instalment payment due March 29 Recontributions to an RRIF (or 30 days after legislation is passed, whichever is latest) The December 15 instalment payment should of course be reviewed in light of these changes and reductions in income in 2008 overall. It may not be necessary for seniors to make that December 15 instalment; avoiding further erosion in retirement savings values caused by withdrawals in the current market. In addition, as reported by example in the last edition of this publication, a more important opportunity resides in the ability to make ìin kindî withdrawals, thereby allowing seniors to avoid locking in losses on their equity values and in fact providing them with the opportunity to earn tax advantaged gains on the shares now held outside the RRIFs. The November 27, 2008 Economic Statement underscores this: "The income tax rules, in fact, permit 'in-kind' asset transfers to meet the minimum withdrawal requirementsóthey do not require the sale of assets. The in-kind distribution of assets allows individuals to meet the RRIF minimum withdrawal requirements and keep their assets intact, so that the assets may benefit from future market growth." Advisors and their clients should discuss these opportunities immediately.

On November 27, 2008, Finance Minister Jim Flaherty presented the 2008 Economic and Fiscal Statement for Canada, providing an update of Canada's current and short term financial outlook, which points to a recovery by 2011 to the fiscal outlook predicted in the 2008 budget and some temporary tax relief for seniors as well, while taking the pressure off organizations struggling with current pension funding deficiencies caused by the world financial crisis. Special reports on these rules follow. Reduction in amounts required for minimum withdrawals in RRIFs for 2008 Economic and fiscal outlook statistics show recovery, soon Extension of private pension plan solvency funding from 5 to 10 years may provide reprieve In addition, spending limitations, including the elimination of $1.95 per vote subsidy by taxpayers to political parties effective April 2009 and annual wage increase limitations for public service employees of 2.3% for 2007-08, and 1.5% from 2009 to 2011. These two controversial measures may rock the boat for a minority government.

The Honourable Jim Flaherty, Minister of Finance will be presenting an Economic and Fiscal Statement at 4:00 pm EST on Thursday, November 27th. The Knowledge Bureau will be preparing an analysis of the statement and will provide you with a special report.  Expect the report in your e-mail inbox on Friday morning. To keep current with all financial and economic news try the EverGreen Explanatory Notes DEMO TODAY! Or call us to subscribe: 1-866-953-4769.

The Minister of National Revenue, the Honourable Jean-Pierre Blackburn, made an announcement recently regarding steps taken to make it easier for businesses to apply for the scientific research and experimental development (SR&ED) tax credit. Due to the onerous filings previously required by the CRA with respect to SR&ED claims, many small to medium sized businesses failed to apply for the SR&ED tax credit. The Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim and accompanying guide have been made more user friendly and organized, and with a web-based eligibility tool being provided, claimants will be more likely to apply for the tax credit program which could ultimately result in more Canadian research projects being undertaken. The changes being implemented were announced in the 2008 budget. More information on this program and the changes made are available at the CRA website located at www.cra.gc.ca/sred. For more information on SR&ED and other tax credit programs, go to EverGreen Explanatory Notes on The Knowledge Bureau website. EverGreen provides an ever current in-house research and analysis department, the most recent news from The Department of Finance and CRA compliance updates.

Leveraging Tax Preferences: Consider funding this new "bucket of savings" with your RRSP tax savingsóa great way to leverage two available tax provisions. But also look at your new investment options from the tax-exempt income within the TFSA. For example, it may make some sense to look at the tax-free income in the TFSA as a source for funding assets that will multiply on a tax exempt basis: for example life insurance, critical illness insurance or a tax exempt principal residence. TFSA or HBP? Consider whether it makes more sense to withdraw funds on a tax-free basis from within an RRSP to fund a new home purchase under the Home Buyers' Plan or whether the taxpayer should save and withdraw funds under the TFSA instead. As there are no tax penalties for failure to pay back the funds to the TFSA, and withdrawals automatically create new TFSA contribution room, it may make sense to accumulate money in the TFSA instead. TFSA or LLP? Education savings strategies should now be revisited as well. Saving within the TFSA allows you to accumulate funds on a tax-deferred basis and then withdraw them without penalty or a requirement to repay the funds. This is not so under the Lifelong Learning Plan, which allows for a tax-free withdrawal from the RRSP but requires an annual repayment schedule. The avoidance of income inclusion penalties therefore makes the TFSA a more attractive withdrawal vehicle for these purposes than the Lifelong Learning Plan. Better to leave the funds in the RRSP for tax deferred retirement savings. TFSA or RESP? This new account would also appear to be a better savings vehicle for education purposes than the RESP, which eventually could provide a tax penalty on withdrawal if intended recipients do not end up going to school. However, in making this choice the investor misses out on the Canada Education Savings Grant sweetener. Offsetting Pension Contribution Limitations. Contributors to employer pension plans are often precluded from making RRSP contributions because of their pension adjustment amount. Likewise those who have contributed the maximum to an RRSP ó 18% of earned income to $20,000 in 2008 and want to do more to supplement their savings on a tax-assisted basis, now have the opportunity to tap into another tax deferred savings opportunity. In particular the TFSA a good place to park interest-bearing investments. Supplementing Executive Pension Funding: Executives who earn more than $111,111 in 2008 will be unable to save for retirement on a tax assisted basis for income above this amount. The TFSA provides a small window of opportunity to shore that tax assistance up. This option should be employed in conjunction with planning for funding of top hat plans like Individual Pension Plans or Retirement Compensation Arrangements. New Tax Sheltering Opportunities for more Pre-Retirees: The TFSA is a great savings option for people who do not have the required earned income for RRSP contribution purposes and therefore have few opportunities for tax sheltered retirement savings. This includes those in receipt of passive income sources like pension income, investment income or employment insurance benefits. New Tax Sheltering Opportunities for RRSP Age-Ineligible Taxpayers: The tax shelter can continue for those who reach age 71 and don't need the money in their RRSP. While withdrawals must be generated under the usual rules, reinvestment into a TFSA will allow those tax-paid funds to grow again ñ faster in a tax sheltered account, as opposed to a non-registered account. Benefits for Single Seniors: RRSP Melt Down Strategy Enhancements: It has always made some sense to melt down RRSPs to "top income up to bracket" in circumstances where taxes will be higher at death than during life. We generally use that strategy for singles or widow(er)s as the RRSP funds cannot be rolled over to as spouse or common-law partner's RRSP. Now surplus funds can be deposited into the TFSA so that retirees can continue to build wealth on a tax deferred basis and keep legacies intact. TFSA Borrowing and Excess Contribution Penalties: Because income from the TFSA is not taxable, borrowing funds to contribute to a TFSA will not be tax deductible. Using borrowed money to invest in non-registered accounts makes more sense as interest is then tax deductible. Estate Planning Considerations. Also note that the TFSA loses its tax-exempt status after the death of the plan holder, meaning that the investment income will become taxable. However a rollover opportunity is possible when the spouse or common-law partner becomes the successor account holder. This will not be affected by the spouse's contribution room and will not reduce existing room either. When an adult child dies without a spouse, the plan should be collapsed or transferred to another appropriate savings vehicle. Marriage Breakdown: Investors in the TFSA will be able to transfer from one party to the split to the other on a no-penalty basis, however, the transfer in this case will not re-instate contribution room for the transferor. Nor will it affect the contribution room of the transferee. File a Tax Return: yet another reason to endear oneself to the tax system: a return is required to build TFSA contribution room and so it is folly to file late or miss filing a return. Remember there is a statute of limitations of ten years in filing late or adjusted returns. Don't cut into your tax exempt wealth accumulation potential by being tardy on this front. Investment Ordering Decisions. The New TFSA requires a second look at the order in which investors maximize accumulation activities. Taxable investors should consider family priorities and then contribute funds in this order: To an RPP To an RRSP (including spousal RRSP) To a the TFSA To RESPs (Registered Education Savings accounts to maximize Canada Education Savings Grants and Bonds) To RDSPs (Registered Disability Savings Plans to maximize Canada Disability Savings Grants and Bonds) To non-registered accounts Next week: More Tax Planning Ideas To Share With Your Clients!