It's Your Money  

Avoid CRA scrutiny

Receiving a letter from the CRA that you’ve been selected for an audit is one piece of mail that absolutely nobody wants.

As we come into the final stretch of this year’s tax filing season, I thought I’d share some red flags that could trigger one.

While some audits are still random, a new approach by the CRA was undertaken following a study that found that random audits detected far fewer cases of significant non-compliance versus targeted ones.

The numbers showed that the random audits resulted in just 12.2 per cent converting to cases while targeted audits resulted in a 46.7 per cent conversion rate.

With that new information in hand, the CRA’s preferred approach today is to identify high-risk areas and focus most of their audits there.

Let’s look at what types of people are most at risk:

You file an adjustment

Mistakes are normal and the CRA has a fairly simple process for filing a T1-ADJ Form to fix mistakes made on your tax return. However, you should be aware that filing an adjustment can flag your return for a closer look and this could lead to an audit.

This certainly doesn’t mean that you should not file an adjustment if required, only that it pays to make sure that your initial return is done properly so it’s not needed. 

You don’t respond to CRA requests

If the CRA reaches out to you and you fail to respond, the risk of being audited goes up significantly. If the reason for their request is to ask for something you don’t have (including more money), you are still far better off to respond and tell them that instead of simply ignoring them. 

Ignoring the CRA will not result in them ignoring you. 

Your reported income doesn’t match your home value

If you live in a nice area with expensive homes and report little to no income, this is an obvious red flag for the CRA.

They use screening tools to compare your reported income to those of your neighbours and look for things that don’t line up.

You are reporting losses yet again

By reporting net losses in a business or rental property for multiple years, the CRA starts to ask some questions.

They begin to wonder if you are renting the property to a family member or friend at lower than market rates or using a business structure solely for the write-offs it provides. Either can be a key red flag for an audit.

Your return has notable changes from last year

If your income or expenses year to year vary significantly, the CRA may want to find out why.

Sometimes this “flag” can result in nothing more than a simple review instead of a full audit, but it is another key indicator for the CRA to dig a little more. 

You sold real estate in the last year

The CRA is shifting significant focus here and the 2019 federal budget earmarked $50 million over the next five years to help increase this focus.

It is very important to file a principal residence capital gains exemption if appropriate but be forewarned that the CRA may want to know more.   

Let's hope a CRA audit doesn't result in further action if you’re filing your returns properly; but it can still be a major headache that costs you a lot of time and money.

Be sure to file an honest, clean and double checked return this year to save yourself a lot of un-needed hassle. 

Tax tips for all stages of life

There is only three weeks left until the tax-filing deadline, yet I haven’t even started to put my own tax file together to send off to our accountant.

You would think that a financial professional would be all over this, but the truth is, I hate filing my taxes just as much as the rest of you. 

But just because I am waiting until the last minute does not mean that I won’t file my taxes on time or won’t make sure that I am structuring things as efficiently as possible to pay less tax. And I certainly hope that the rest of you will do the same.

With the deadline a few weeks away, I thought it was worth one more tax-related column to highlight some last-minute tax planning ideas that people in different stages of life should do in order to make a big difference: 

Teenagers — Most teens don’t earn enough money to be required to pay income tax and they generally don’t have to file a tax return. But even though they don’t have to, they likely should.

The minimum earned income for 2019 to pay tax is $12,069 and most teenagers who work will likely earn under this amount. That income does, however, still create RRSP contribution room and even though the teen may not plan to contribute to an RRSP right away, filing a tax return will lock it in.

The room will accumulate and carry forward and their future self will be very thankful for the extra room to use for tax planning down the road.    

College Students — There are similar benefits to filing a return for college students even if they also don’t need to do so. A college student will also have the $12,069 basic tax-free amount, but they can additionally claim tuition payments and even transfer certain credit amounts over to their parents.

Those students drawing out RESP funds and also working part time or in the summer need to be sure that they’re managing the RESP withdrawals properly to minimize any taxation issues. 

Working Years — A poll was released the other day that showed most Canadians still see a tax refund as a windfall instead of as their own money being paid back to them. The reality is that a tax refund is really just the result of poor tax planning.

While not much can be done for this year’s filing, those employees with fairly stable income should look at this year’s return and if they are getting a refund yet again, consider filing a T1213 form.

This CRA form is used to “Request to Reduce Tax Deductions at Source” and once approved, can authorize your employer to reduce the amount of tax withheld at source for 2019.

Reducing the tax withheld at source will allow you to re-deploy the extra money on a monthly basis directly into debt reduction or retirement savings.

Retirees or Soon to Retire — For anyone over age 65, make sure that you are claiming the pension income tax credit. Even if you’re still working, this credit will allow you to withdraw $2,000 per year from a “pension source” tax free.

If you don’t have a pension and aren’t ready to convert your RRSP account over to a RRIF, you can still convert a small portion of the RRSPs over so that you have enough to pull at least $2,000 out each year.   

Benjamin Franklin once said that “In this world nothing can be said to be certain, except death and taxes.”

So if you have to file your tax return, you might as well file it on time and do it right.

Give gift of financial literacy

Many grandparents I know have discovered the value of providing a financial gift such as an RESP contribution to their grandchildren instead of another toy that they will likely lose or forget about in short order.

There is another type of gift however that grandparents are in the unique position to pass on to their grandkids, but many don’t know how to do it or where to start.

The gift of financial literacy is likely the most valuable thing you can ever pass on to your grandkids and until we create the necessary framework to build this into our core education programs, it’s something they desperately need. 

But why do I suggest putting this task on the shoulders of a child’s grandparent and not their parents?

Most of the time, grandparents have an edge over parents in their ability to talk more freely with their grandchildren.

While children will sometimes resist listening to financial advice from their parents, they may be more willing to hear grandma or grandpa out.

Some parents fear that the grandparents might meddle too much or make their lives more difficult, so the parent’s prior support and blessing is important here. 

While this all sounds wonderful, how should it be initiated?

It all starts with a conversation; and it’s very important not to be too pushy here. Children want to learn, but they also want to know how it will apply to their lives. 

Grandparents could consider telling some stories of how they bought their first house and how they paid for it. Or they could explain their retirement income streams and how they pay for expenses without working anymore. 

The next step will be to get the grandchildren involved themselves. With the parents’ permission, of course, you could consider giving a grandchild a cash gift for their birthday or Christmas.

Give the grandchild three jars and label them:

  • spend
  • save
  • donate 

They can allocate one-third of the cash gift to each of the three jars. The “spend” jar can be used at any time to buy items they want.

The “save” jar is money that should be put away or invested for the long term.

Finally, the “donate” jar is money that should be set aside to donate to charitable causes. 

Over time, the grandparent could then have discussions with their grandchild on how to use the money in each jar. They could take their grandchild to meet their own investment adviser once their “save” jar has built up a little.

A field trip like this with grandma or grandpa can be a very memorable occasion and also a great learning opportunity.

With the help of the grandparent, the grandchild could also set up their own investment account with the advisor or online and choose their own investments. 

The “donate” jar provides another great lesson in the making. The grandparent(s) could set up a special time for them and the grandchild to meet and talk about different charitable causes.

They can discuss the pros and cons of each option and select one that the child believes in. 

If a certain dollar amount is required for the type of gift the grandchild wants to make, they may even want to do a little fundraising in the family or with odd jobs to reach their donation goal. 

Opportunities for learning are everywhere and ones that may seem minor to you could be a great addition to a grandchild’s financial literacy.

Consider taking them along to the ATM machine and having a discussion on where that money comes from and how it got there. Take them out for lunch afterwards and discuss the bill and why you’re leaving a tip for the server. 

Parents can definitely apply many of these same strategies and help teach their children about financial matters but don’t forget that grandparents can also assist in this role.

This may create a great way to share some special time and leave a lasting impression that will benefit them for the rest of their lives.   

5 ways not to get rich

Want to avoid becoming (or staying) rich? Good news! It’s simple!

Just follow these five foolproof rules and you’ll be well on your way to the poorhouse: 

Blindly pay your taxes without a plan 

Good tax planning in your income earning and retirement stages can save considerable amounts of money. Income splitting opportunities exist in both your working and retirement years as well.

If you own a business, tax planning strategies can go even farther to reduce your tax bills and keep more money out of the government’s hands. If you’d rather be poor, simply skip all tax planning strategies and pay whatever the CRA bills show at the end of the year. 

Guarantee a loss for your investments

Skip all forms of tax advantaged investing such as TFSAs, RRSPs and corporate investments and invest any money you do put away in a simple non-registered account.

Make sure any money goes into ultra-safe GICs and term deposits that are paying out only one or two per cent per year. Once you take inflation (averages around two per cent per year) and taxation (could take away 50 per cent of your earnings) into account, this will mean you are guaranteed to lose money.

Earning two per cent per year gross and paying half of that back in tax, you’ll be left with a guaranteed negative net return after inflation.

Wait as long as possible to start saving

Make sure you don’t start putting money away at an early age as compounding will significantly multiply the growth of your savings over time.

For example, if you were to put $200/month away starting at age 20, you’d have $733,804 by the time you reach age 65 (based on a seven per cent average rate of return) 

If you wait until age 45 to start saving and put $500/month away instead, you’ll only have $263,191 to show for it.   

Don’t prepare for emergencies

You don’t need to purchase any disability, life or critical illness insurance as I’m sure nothing unexpected will happen to you or your family. And certainly, don’t worry about putting aside an “emergency fund” with six months of living expenses in case something occurs.

It’s not a big deal that two out of five Canadians are expected to develop cancer during their lifetimes and I highly doubt anyone has ever lost their job or had to take time off work due to a family member’s illness, right? 

Don’t have a financial plan

When it comes right down to it, it’s probably best to have no plans at all.

To ensure that you won’t be financially secure, you should probably avoid planning for your goals, risk tolerance, unexpected events, retirement needs and other financial obligations altogether.

If you just keep paying your monthly minimum bills and spend whatever is left (or better yet borrow money to buy what you can’t currently afford), I’m sure things will work out just fine on their own. 

That’s it! Avoiding becoming rich and losing what you already have is just that easy. Follow these simple steps and you’ll be living on the taxpayer funded government’s handouts, or even back in your parent’s basement in no time. 

Or if you want to be financially secure and retire comfortably, I guess you could just do the opposite of my suggestions too. It really is just as easy to choose either path. But the choice is up to you…   

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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