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:

Boomer parents may be finding that with university graduations come new living arrangements and that takes some tax planning!  Surprises may be in store as they get ready to file 2007 tax returns for their adult children. Following is a checklist of tax facts to consider when conjugal relationships bloom into new living and filing requirements:   TAX CONSEQUENCES OF LIVING COMMON LAW Definitions for Tax Purposes: The Income Tax Act considers only those who are legally married to be ìspousesî. However, for tax purposes, spouses and common-law partners are treated equally. For common-law partners, there is no ceremony to fix the date at which the relationship can be deemed to begin so a definition is required. For tax purposes, a common-law partner is a person who is not the individual's spouse and with whom the individual are living in a conjugal relationship, and that person: has been living with the individual in a conjugal relationship for at least 12 continuous months, is the parent of the individual's child by birth or adoption, or has custody and control of the individual's child and that child is wholly dependent on that person for support. If the couple is no longer living together at the end of the tax year and is still separated 60 days after the end of the year, they are not longer considered to be common-law partners. However, they immediately become common-law partners again if they resume living together. Combine Net Income. As a common-law couple, individual tax returns must be filed, but net family income must be combined for purposes of refundable tax credits like the CTB, GST and provincial credits. One Tax Exempt Principal Residence. Common-law couples must be aware they can only have one tax-exempt principal residence per household (whereas singles can have one each). Spousal Credit Claims. Depending on the size of net income for each person, one may be able to claim the other for the $9,600 spousal credit (but this is reduced dollar for dollar by their net income). Options re Non-Refundable Tax Credits Claims. In addition common-law couples can claim each other's medical expenses (usually claimed on the return of the spouse with the lower net income for maximum benefit) and maximize their charitable contributions (it's best to combine receipts so that they are over $200 for a better tax break).  The amount for minor children can also be claimed by either spouse or split between them to maximize the use of the credit. Tuition/Education/Textbook Credits. Up to $5000 of tuition, education and textbook credits can be transferred to a supporting spouse if they can use the credits to reduce their taxes.  Spousal RRSP Contributions. If the couple expects to remain together, they may wish to start making spousal RRSP contributions to equalize deposits there. Money can be withdrawn on a tax-free basis from an RRSP under the Home Buyer's Plan, so this might be a way for them to save for their first home on a tax-advantaged basis. Attribution Rules. From an investment point of view a common-law couple is treated the same way as a married couple. That is, if a transfer of capital from the higher earner to the lower results in the earning of interest, dividends or capital gains, that income is reported by the transferee. These rules can only be avoided when an inter-spousal loan is drawn up so long as the rules that apply to the loan are adhered to. More information on basic tax principles can be found in Evelyn Jacks' Essential Tax Facts, which is a great gift to young adults who are setting out on an independent life.

The off-return implications of pension income splitting can vary significantly by province. Here's some feedback received from our readers. Dan Reynen of Dan Reynen Business Services in Campbell River BC writes: In BC the Per Diem rate charged to people in Care (Senior's Housing etc) is based on their Total Income from the previous year. This means their 2009 Per Diem rate will be based on their 2007 Income Tax Return. The government allows pensioners to file a form declaring they are separated due to medical reasons. They then only use the person in care's income in determining how much they are charged at the home. Splitting pension in this case can seriously affect how much is charged to the person in care. If the person in care is not the pensioner splitting the pension will increase the Per Diem. The Per Diem increase can be far more than the tax saved. Check carefully. You could have a situation where they are already paying the maximum Per Diem anyway so the splitting of pensions won't affect them. The two other items to be taken into account from this are, will one or the other be going into care in the near future and which one first. You really need to get to know your elderly clients well before deciding the best way to split the pension income. You could try to use your crystal ball. Since this does not actually affect them until two years (1.5 years) down the road. Peter Coles, Tax Research and Training Specialist of H&R Block writes: Ö it appears that the decision to split pension income may sometimes involve more than the tax considerations. For example, in Saskatchewan, nursing home fees could be adversely affected by an increase in the Line 150 amount of the pension transferee. The Alberta Seniors benefit could also be affected (although this would only affect low-income seniors who probably would not have much pension income to split). By the way, Nova Scotia Pharmacare works the same way as Manitoba Pharmacare and could be adversely affected by an increase in the pension transferee's Line 150 amount. We are hoping that the various provincial governments will fix their regulations to take pension income splitting into account. Manitoba Health has already advised us that they are currently reviewing pension income splitting provisions. However, it might be dangerous to assume that all provincial governments will follow through. It is also worth noting that where spouses or common-law partners are involuntarily separated (for example, where one of them is in a nursing home), the Guaranteed Income Supplement (GIS) that each receives will be recalculated based on their individual income. Transferring pension income in this situation could therefore adversely affect the GIS entitlement of the pension transferee. Ö there could be other government programs affected by pension income splitting that we are unaware of. Our policy is to ask our clients whether they are receiving benefits under any federal or provincial income-dependent programs. If they are, then we check them out to see if pension income splitting could have any adverse consequences.

Recently there has been a modicum of good news for investors in the Crocus Fund, a Manitoba-based Labour-Sponsored Investment Fund. The fund ceased trading 1995. In an out-of-court settlement reached recently, 34,000 unit holders may receive a portion of $12 Million. The settlement is expected to take place sometime this fall.  What will the tax consequences be?  That will depend on whether the money is held in a registered or non-registered account. But first, it is important to note that under normal circumstances LSIF investors who redeem their investments before the required 8-year holding period would be required to repay the tax credits earned by the investment. Exceptions can be made in such circumstances as terminal illness, disability or severe hardship so one would expect that an exception will be made for Crocus investors as the redemption was not voluntary.  In fact, the Manitoba government has already confirmed that this will be the case. Of course, there will be no tax relief for investors whose fund units were held in their RRSPs. Any investor who holds the units in a non-registered account will be able to claim a capital loss in the year that the proceeds of disposition are final. In most cases, one would expect that the ACB of the investment would be the sum of the initial investment and the tax credits claimed, but the Income Tax Act specifically exempts LSIF units from this rule so the ACB will be the amount initially invested.

Andrew Brash Update Andrew Brash, Knowledge Bureau Faculty member, began the first leg of his journey back to the summit of Mt. Everest Tuesday when he boarded a plane in Calgary. Andrew's return follows aprevious triumphant defeat and display of personal heroism and human compassion: the saving of fellow mountaineer Lincoln Hall, who was left for dead 200 meters from the summit. Despite unrest in Tibet over Chinese rule and the potential "closing of the mountain" to take the Olympic torch to the top, Andrew still has high hopes to complete his "unfinished business". There is always the Nepalese side available to climb if the Tibetan side is unavailable. We will be featuring an ongoing update on his dangerous return to climb Mt. Everestas part of Breaking Tax and Investment News. We will also be linking you to Andrew's website andrewbrash.com for live updates from the expedition. Join us as we journey to the top of the world with Canadian Hero, Andrew Brash! Bookmark knowledgebureau.com and stay tuned for updates!

One of the most frustrating areas of tax return preparation is preparing a return properly when the employer won't issue a T4 slip with the proper numbers. In my practice, this issue comes up with two government departments (one provincial and one federal) who claim that they cannot re-issue T4 slips but instead issue a letter along with the T4 slip which indicates the portion of the employee's income that is not subject to income tax because it is earned on a reserve and the taxpayer is a status Indian. The first step in the process of preparing an accurate return is to prorate the proper amounts on the T4 slip, according to the percentage provided by the employer. In addition to the employment income shown in Box 14, the following amounts need to be prorated: CPP pensionable earnings in Box 26 and the resulting CPP premiums in Box 16 (although the employee may elect to participate in CPP on the exempt earnings)  RPP Contributions in Box 20 Pension Adjustment in Box 52 Union Dues in Box 44. If you miss prorating the RPP and union dues deductions, CRA will eventually reassess the return to disallow the portion of the RPP contributions and union dues that relate to the non-taxable income. In my experience though, they do not prorate the pension adjustment unless you request them to do so. File the return, either by EFILE (in which case you need to put the non-taxable portion of the income in Box 71 as well) or on paper. If filing on paper, be sure to include a copy of the letter from the employer. Either way, the return should pass initial assessment as filed. However, you can expect that some time in the summer your client will receive a Notice of Reassessment as the numbers reported don't match the numbers on the T4 slip and the matching program has automatically made the ìcorrectionî. That reassessment can easily be reversed by contacting CRA and straightening out the situation. For an EFILE return, the letter from the employer will be needed at this time. If the taxpayer has a spouse and children, you can expect that the spouse's return will likely be reassessed as well to move claims for child care expenses and reporting of the UCCB if they become the lower-income spouse as a result of the taxpayer's reassessment. Once the taxpayer's reassessment is reversed, the spouse's can be as well. The whole process is not only frustrating for the preparer but also for the client.

The individual provinces and territories provide health care insurance and many provide subsidies for the cost of prescription medications for their residents. The cost of the programs and the amount of subsidies are often linked to the taxpayer's income. While splitting pension income may reduce income taxes, preparers need also to be aware of the possible negative effects on health costs for their clients. Provincial Health Insurance Most provinces build the cost of provincial health coverage into their income tax rates but three provinces, BC, AB, and ON levy a clearly identifiable fee for health insurance. In BC and AB, the fee is billed and paid directly. In Ontario, the Health Premium is calculated and paid along with the normal Ontario Tax. BC and Alberta have premium assistance plans which are based on the couple's prior year net income (for BC) and the prior year's taxable income (for AB). Since transfer of pension income does not affect either the couple's combined net or taxable incomes, there are no effects in either province if pension income is split. The Ontario Health Premium, on the other hand is calculated based on the individual's taxable income. Thus pension income splitting will affect the amount of the Ontario Health Premium. For low-income seniors, the result will often be a reduction in the premium if income is split. For higher-income seniors, the health premiums may rise, but not nearly as much as the amount of tax that may be saved by splitting of pension income. PharmaCare Most provinces have a plan to help reduce the costs of prescription drugs for their residents and for seniors in particular. The majority of these plans have deductible or co-pay amounts that are based on a couple's combined net incomes. In those provinces, splitting of pension income will not affect the cost of prescription drugs. Some of the notable exceptions are: Saskatchewan: The new flat rate for seniors comes into effect on July 1, 2008. Seniors will quality if their individual net income (based on 2006) is below the $64,044 threshold. If splitting of pension income in 2007 brings one spouse's income below the threshold and does not bring the spouse's above the threshold, it would appear that seniors may lose their eligibility for the Senior's Drug Plan once the base year becomes 2007. Manitoba: Currently, the deducible for prescription drugs is based on the family total income. Since pension income splitting increases the transferee's total income but does not affect the transferor's total income, transferring pension income increases family total income. One would expect that the Manitoba government will adjust the criteria so that this anomaly will not affect the cost of prescription drugs for seniors before 2007 become the base year for determining the deductible amount.