Category Archives: death and taxes

7 ways the tax man is watching you

tax man is watching you

CRA is scouring your social media & donning disguises

Whether it’s through a photo on social media or a casual conversation with a friend, the Canada Revenue Agency is always watching and listening. And their investigators will pursue you tirelessly if they think you’ve been lying on your tax return. Their subject of choice? These days, it’s anyone and everyone.  “We always think it’s only the rich who the tax man is interested in but it’s the little fish they like the best,” says Paul DioGuardi, a senior tax lawyer and author of The Taxman is Watching. “The Internet is becoming a favoured weapon for the CRA to find and analyze all kinds of data so they can watch people they think are cheating on their taxes.”

Here’s five ways the CRA may be watching you that you probably weren’t aware of.

1. Your social media

Any of your open social media accounts are publicly accessible and some posts could prompt a CRA investigation into your financial life. From the CRA’s point of view this is a legitimate practice on their part because posts on social media really aren’t private. How does this work? Say you just bought a new $85,000 sail boat and are boasting about it by posting a photo of it on Facebook. The CRA could see this and then check it against what you declared as income last year. “If you declared $40,000 in annual income, or a modest amount, they’re going to be suspicious and come calling,” says DioGuardi.

2. Your sales and purchases on Kijiji, Etsy and Ebay

Is your passion for vintage furniture really a hobby? Or are you running a small business from your living room and not declaring the profits on your tax return? “To compare this data would take years in the old days,” says DioGuardi. “Now the CRA can data-mine these non-traditional sources of info in a heartbeat pretty much whenever they like. They are a collection agency with police-like powers.”

3. Your small business’s sales data

Cheating on your company sales numbers by declaring lower revenue than is actually the case?  Don’t. The CRA is able to use data to plow through years’ worth of your credit card transactions with the aim of matching your stated sales with electronic data they’re able to access.

4. Bank accounts and investments

To spot undeclared, taxable interest, dividend and capital gains income, the CRA has access to info from all Canadian financial institutions. They can also determine if you’ve exceeded your TFSA and RRSP contributions and penalize you accordingly.

5. Capital gains from condo and real estate sales

“In the old days I had to go to the registry office to find out when a piece of real estate had been bought and sold,” says DioGuardi. “Not anymore. The Internet changes the game.” Now, the CRA can look at all real estate transactions and easily flag suspicious transactions. What are they looking for? Condo flippers and real estate sales where the owner hasn’t declared capital gains and paid the appropriate taxes. Multiple property ownership where the taxpayer isn’t also declaring rental income is another trigger for investigation.

6. Your income and pensions

The CRA is hunting for disparities in retirement income. It can access info on your bank account balances and income and match it with previous tax returns. If there’s a wide discrepancy, be prepared to answer more questions.

 7. Mystery shopping

Don’t be surprised if CRA agents show up at your restaurant or other small business, in disguise to eat a meal with the intention of rooting out suspicious financial behaviour. The agents could pose as a couple out for a meal to see how your business works and what the count is for people frequenting your business to ensure it is aligned with what you have reported in previous tax returns. “It’s a big job and I think they will sub-contract a lot of this out in future,” says DioGuardi.

What does all of this mean? That the shift of responsibility is really shifting to the taxpayer and not the tax collector. In the past, the tax man simply told you what you owed.  These days it’s completely up to you to declare what you should be paying, and they have the means to check that what you’re saying is absolutely accurate. “Remember, they can search anything, put liens on your property and slap you with penalties and late fees,” says DioGuardi. “My suggestion is to always give full and complete disclosure on your annual tax return. With data mining the way it is today, if you don’t, then believe me, they will find you.”

Source: MoneySense.ca – by  

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Joint tenancy can help avoid probate fees but not necessarily capital gains tax.

Joint tenancy can help avoid probate fees but not necessarily capital gains tax. 

Q: I have joint tenancy with my mother on two properties—a condo in Toronto and a cottage in Kawartha Lakes. She passed away in June 2014. I am keeping both properties. My accountant says that he can count the condo as my mom’s primary residence, but I have to pay capital gains tax on the cottage even though we have joint tenancy. I thought that with the right of survivorship, I didn’t need to pay capital gains tax? He says I am wrong. Can you please tell me what you think?

Kim

A: The Canadian Inheritance Study by Decima Research estimates that about $1 trillion in inheritances will be received by Canadian Boomers in the next 20 years. So your estate planning conundrum is becoming increasingly common, Kim.

When property is owned by more than one party, it is frequently held in joint tenancy with the right of survivorship. Spouses typically hold property as joint tenants, whereby upon the death of the first, the asset passes directly to the survivor and does not make up part of the estate of the deceased. More and more, I am seeing elderly parents holding property in joint tenancy with their children, which has pros and cons.

One of the pros is that the time and cost to administer an estate may be reduced. In particular, assets held in joint tenancy that pass to a survivor typically avoid probate fees. Probate fees in Canada can be as high as 1.5% of an estate (Ontario) and must be paid on certain assets in order to validate the will and permit the estate trustee to distribute assets to the beneficiaries. Other provinces have lower, flat fees and probate is less of a financial concern.

One of the many cons is that capital gains tax issues may arise.

In some cases, Kim, when someone gifts an asset to another person, there is capital gains tax that arises at the time of transfer. This is because when you transfer an asset to a third party—or any part thereof—even if money hasn’t changed hands, you are generally deemed to have sold it at fair market value.

In your case, it could likely be argued that the gift of half of your mother’s condo and cottage was not an outright gift, but rather, a case of a resulting trust. Assuming your mother was the sole owner at the time of transfer, used the properties herself and paid the ongoing maintenance costs, case law may suggest that the presumption of advancement did not apply and you were technically holding half the properties in trust for your mother. Accordingly, capital gains tax would not apply at the time of transfer. Though the properties may have been legally held jointly by the two of you, the properties were still beneficially your mother’s until her death.

Ask a Planner: Leave your question for Jason Heath »

Every Canadian is entitled to have one principal residence that grows in value tax-free. Your mother had two properties, meaning that one of them was growing in value on a tax-deferred basis. On your mother’s death, she would be deemed to have sold the two properties and one sale would be taxable, regardless of her holding the properties jointly with you. Capital gains tax would be payable at that time.

So I’m sorry to report that your accountant is correct, Kim. There is capital gains tax payable on one of your mother’s properties. You have discretion as to which property you deem to be her principal residence and you may be able to designate one property as her principal residence for some period of time and one property for another period of time. In other words, if she owned her condo for 20 years and her cottage for 10 years, you might deem her condo to be her principal residence for the first 10 and her cottage for the second 10, in particular if the cottage was worth more and/or rose more in value.

In this example, half the condo capital gain would be taxable and the cottage capital gain would be tax-free. In this way, you can at least retroactively minimize the capital gains tax payable.

Another important point is that if your mother didn’t pay capital gains tax when she gifted the properties to you, which I assume she didn’t, the properties may technically be subject to probate and the resulting cost of probate fees. This is because these assets still technically belonged to your mother on her death and likely should have made up part of her estate for probate purposes.

Capital gains tax is a fact of life, Kim. And in this case, a fact of death. Although it’s unfortunate to pay it, it’s better than the alternative—having an investment that has not gone up in value or worse yet, has lost money.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ont. He does not sell any financial products whatsoever.