Don't pay too much tax. That optional inventory amount (OIA) carried forward from 2011 completely slipped your mind? Too bad...it's going to cost you. And maybe you've made other errors too. Here's a list of common farm tax filer blunders.
Tax return time is looming once again. We can't suggest ways to avoid income taxes altogether, but we can help you hang on to as much of your hard-earned money as possible.
One of the first things we do for new clients at FBC is review a minimum of 3 years' previous tax returns. We frequently find errors. Many of these, when corrected, trigger refunds of previous taxes paid. Among the more common mistakes uncovered on those prior years' tax returns are 3 that all farm operators may want to watch for:
- Missed credit and deduction carry-forward balances
- Not optimizing net farming income for discretionary claims
- Capital cost allowance errors
1. Missed Credit and Deduction Carry-forward Balances
First is the failure to pick up credit and/or deduction carry-forward balances from previous years. Among these items are:
- Ooptional inventory amounts (OIA)
- Mandatory inventory amounts (MIA)
- Expenses related to home workspaces and farmland improvement
- Business investment tax credits
- Both capital and non-capital losses
2. Not Optimizing Net Farming Income for Discretionary Claims
Second is the failure to optimize net farming income for discretionary claims. These discretionary items include over-claimed capital cost allowance (CCA) that could have been used in future years when marginal tax rates might be higher, and missed OIA.
3. Capital Cost Allowance Errors
Third are errors related to CCA. After applying the one-half year rule adjustment to the cost of capital additions in the year they were acquired, we find some clients forget to add the remaining half balance of the cost to the correct CCA pool in the subsequent year. Also, new capital additions are often classified in the wrong rate classes resulting in a CCA under-claim or over-claim.
But these are not the only errors. We find many more.
Additional Steps to Avoid Paying Too Much Tax
Here's a list of additional steps you can take to avoid paying more tax than absolutely necessary:
Don't assume you must claim all deductions/credits this year.
As outlined above, some deductions/credits are discretionary. This means you can either claim them this year or defer them to a future year when you expect your marginal tax rate will be higher and you'll save more money claiming them then. CCA is certainly one example. An RRSP deduction is another. On the other hand, don't forget to claim these deductions/credits at some point, particularly if their carry-forward period is approaching expiry.
Don't bring your taxable income below certain thresholds.
In deciding whether or not to defer discretionary deductions, take a look at what your income would be if you claimed them. If claiming the deductions brings your income below the threshold where you become taxable you'll want to hold off claiming some of them.
You may also want to avoid dropping your 2012 federal taxable income below $42,707, the point at which the federal marginal tax rate jumps from 15% to 22%. You'll save more tax if you apply those deductions when your income is over that threshold.
Remember your provincial tax credits.
Prior to 2000, all provincial taxes were calculated as a percentage of federal tax owing. Now, however, all provinces calculate taxes based on your taxable income, and each province offers its own non-refundable tax credits for items such as donations, medical expenses, and so on.
Also, check out your tax forms to see just what refundable credits are available in your province. If you live in Ontario, for example, you might be eligible for a property tax credit; in Manitoba you might get a personal tax credit. Ontario and Manitoba also offer provincial tax reductions for lower-income residents.
Don't split medical expenses between spouses.
Make sure you and your spouse claim your medical expense credit on the tax return of the lower-income spouse. That lets you claim more, since medical expenses must reach a minimum percentage of income before they are claimable. You can read more about this in our article, Medical tax credits.
Transfer credits to your spouse if you can't use them.
The age credit, disability tax credit, pension credit, and tuition or education tax credits are all eligible for transfer. You can also transfer dividend tax credits to the higher earner if you transfer the dividend income as well. Do this if the lower-income spouse would be unable to use the credit and only if doing so would increase the spousal credit claimed by the higher-income spouse.
File a tax return even if you're not taxable.
You can access money under various government programs only by filing a return. For example, if you want to claim the GST/HST credit, the Universal Child Tax Benefit or seniors' Guaranteed Income Supplement, the net income declared on your tax return determines the amount you receive.
Always file your tax return on time.
When expecting a refund, the sooner you file, the sooner you get your cheque. If you owe money, you'll avoid a hefty late-filing penalty of 5% plus 1% for each month the return was late (up to 12 months), as well as 3% interest on taxes owing (based on CRA's prescribed interest rate as of June 2014).
Don't delay filing because you have insufficient funds to pay the balance owing. Payment can always be made later as you'll be charged interest but no penalties.
Filing on time also avoids disruption in the flow of GST/HST credit, Child Tax Benefit, and related provincial payments. If you're still missing tax slips as the due date approaches, use your statements to calculate information needed for your tax return. Attach the statements to your return as well as a note indicating which slip is missing. Send the slip into the tax centre as soon as you get it.
Your personal tax return for 2012 must be filed with CRA by Tuesday, April 30, 2013.
Self-employed individuals and their spouses have until June 15 to file, although any tax owing must be paid by April 30, 2013.
Don't make math mistakes.
While this advice seems almost too obvious to mention, check and double-check your calculations. Canada Revenue Agency (CRA) says the most common mistakes on tax returns are simply bad math. Watch for a figure transposed or added or subtracted incorrectly, or miscalculated percentages. These errors can lead to your paying more tax than you really owe.
Need to amend a past return?
You can ask for a change to a return for a tax year ending in any of the 10 previous calendar years. Check the CRA website for information on how to change your income tax return.