Well the personal tax return season rush is basically over but I will continue preparing tax returns for 2012, and prior years, for the balance of the year. While reflecting on the achievements of our 2012 tax season I’m reminded of the clients surprised by information I shared with them. Here are 5 significant 2013 Canadian client surprises this season:
1. RESP Funds Received. The surprise was that the money was taxable. The good news is that the money is taxed to the student, who usually doesn’t have a lot of income that year and tax payable is minimal, if any. A T4A slip is received from the investment source and the amount is recorded in Box 42.
2. CPP on Self-Employed Earnings. I met for the first time with two self-employed clients. They were surprised that they were contributing to their CPP. When reviewing their returns I explained that as sub-contractors or self-employed they had to contribute to their CPP if net self-employment income exceeded $3,500. They are obligated to pay the employee and the employer portion. Their previous tax preparers had never explained that fact to them and they had been worried for years about their retirement.
3. Medical Expenses. When reviewing returns with clients they were surprised that the total amount they paid in medical expenses was not reflected in their tax summaries. I explained that the credit for allowable medical expenses was calculated at 3% based on excess of their net taxable income, to a maximum of $2,109. An example of this calculation is; if net income is $30,000 then they would need more than $900 in medical expenses before the credit could be implemented. That’s why it is the rule of thumb to apply the medical expenses to the person with the lower net income when preparing tax returns for couples. The main reason that this would not be the case is if the person with the lowest income had no Federal Tax payable. Medical expenses can only help you reduce your tax liability.
4. Donation Receipts. Like the medical receipts, clients were surprised that the total amount they contributed wasn’t reflected on their tax summaries. With donations, the first $200 is credited at 15% and with amounts over $200., the credits are calculated at 29%. Like Medical Expenses, these credits can only help reduce your Federal Tax owing. If there is no Federal Tax owing, the donation credits can be carried forward for 5 years. If filing as a couple, donations should be combined, no matter whose name is on the receipts, for maximum benefit. The rule of thumb is to allocate the donation receipts to the person with the highest taxable income.
5. Daycare expenses. Year after year the question comes up as to why all daycare expenses cannot be used. There are a couple of surprises where this expense is concerned. First, unless you’re in a married or common-law relationship, the individual with the lowest income must claim the daycare at 80% of earnings. An example would be; if the person with the lowest income earned $8,000 the allowable daycare expense would be $6,400, even if the daycare receipts indicated $7,000. Second if you are in a partner relationship and you have no earned income, then none of the daycare expenses are allowable. Employment Insurance (EI) is not considered earned income. There are other exceptions to the lowest income rule, along with maximum amounts allowed based on the child’s age that can be found by clicking here.
If you were surprised by any changes or explanations to the 2012 tax rules or preparation of your personal tax returns, I would be interested in hearing from you with the details. Don’t forget to leave a link back to your own blog if you have one via the commentluv feature here on the site.
Until next time,
Tags: 2012 tax changes, accounting Newmarket ON, bookkeeper Newmarket, Bookkeeping Newmarket, Bookkeeping Ontario, CPP self-employer earnings, donation receipts for taxes, Maureen Burleson, outsource accounting services, RESP funds taxable, Tax preparation Ontario, tax preparer Newmarket, Tax Returns Ontario, taxes and daycare expenses, taxes and medical expenses, The Montana Group