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Nine questions your tax preparer should ask

The Canadian Income Tax Act has grown exponentially in recent years. It now comprises thousands of clauses, sub-clauses and double negatives. Let's face it: For all intents and purposes, today's tax laws are incomprehensible to the average person.

So it's not surprising that more than half of all Canadians now resort to professional help to file their tax returns. But if you decide to hire someone to handle the task for you, you should be careful.

Professional tax preparers complete hundreds of returns each tax season, often working long hours. They need to work fast, which doesn't always leave them enough time to deal with each client's specific issues.

If you don't explain all of the circumstances in your life that affect your tax position, your accountant won't be able to do his job properly.

To help, we've prepared a list of nine basic questions your accountant should ask you when bring him your T4s, T5s and assorted receipts. And if he forgets to ask these questions, you should give him the information anyway.

Are you married?
Your marital status affects the amount of tax you pay in a variety of ways. For example, if your spouse is not working, you can list him or her as a dependant, and you will be eligible for a tax credit.

The fact that you are married also makes you eligible for numerous income-splitting opportunities and subject to specific rules as to which spouse can deduct certain expenses.

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Don't forget that in Canada, the term "spouse" includes married, common-law and same-sex partners. Common-law and same-sex relationships are defined as two persons who live in a conjugal relationship for a continuous period of at least 12 months.

How old are you?
Your age affects your tax position in a variety of ways. For example, if you are 65, you may be eligible for a tax credit of as much as $606 depending on your income level.

Seniors can also include certain extra expenses in their calculations to determine their eligibility for medical deductions. These include, but are not limited to, artificial limbs, prescription glasses and dentures.

Your age is also an important consideration in rules governing your RRSP, since once you turn 69, you can no longer contribute to the plan and must begin taking money out.

Were you employed last year? Did you list all of your jobs?
The answer may not be as obvious as you think. Employers generally issue T4 slips in February, which list key information such as your employment income and the amount of federal and provincial taxes deducted.

But even if your employer doesn't issue you a T4 slip, it is still your responsibility to declare all your employment income, including income from part-time and temporary jobs. If you don't, you risk having your return reassessed, and you may have to pay interest and penalties on the extra amount.

Make sure to tell your accountant about all of your income sources, so he can give you the best advice.

Do you own a business?
Owning a business changes your tax position in a variety of ways. For one, you have to file a statement of revenues and expenses with your tax return. If your business is incorporated, you will have to file an additional, separate set of returns.

Running your own business makes you eligible to deduct a variety of expenses not available to salaried workers.

Typical deductions include the cost of operating a home office, including a separate phone line, computer and sometimes even Internet access. If you use your car for your business, you may also be able to deduct a portion of its operating costs.

The typical test is that any expenses must be reasonable and must be incurred to earn income. Your accountant or tax preparer will be able to help you navigate the many and complex rules governing these deductions.

Do you own a home or income property?
In general, there are few income tax consequences governing your home or principal residence, as the Canada Revenue Agency likes to call it. Capital gains made from the sale of one's principal residence are exempt from tax, making real estate a good investment opportunity.

However, this exemption does not apply to rental units or secondary residences (such as a cottage) that you may own. The limit on principal residences is one per couple. That means you can't tell the CRA that one house is your principal residence, and the second is your husband's. You must choose one principal residence as a couple, and the second property will be considered your secondary residence.

If you own a rental unit, you have to file a separate statement of revenues and expenses for the property and will be subject to a complex series of rules as to what you can and cannot deduct.

Do you have any financial holdings?
Interest and dividends on any stocks and bonds you own are taxable, including assets held overseas. Make sure you tell your accountant about all of your holdings because he may be able to help you reduce your future tax liabilities.

For example, interest income is generally taxed at regular rates, but dividends and capital gains benefit from preferential treatment, which may make it advantageous for you to hold stocks rather than bonds.

Do you have any kids? How old are they?
If you have children, you are eligible for a slew of write-offs, including deductions for childcare expenses and tax credits for university or college tuition fees. However, there are specific rules governing which spouse is eligible to benefit from these deductions.

Do you have a Registered Retirement Savings Plan?
Whether or not you have an RRSP is one of the most important things your accountant or tax preparer needs to know. Any contributions you make to an RRSP (as much as 18 percent of your earned income) are tax deductible. However, any withdrawals are included as part of your taxable income.

RRSPs are one of the best tax reduction and deferral strategies around. If you don't talk to your accountant about your RRSP, you may miss out on some significant benefits.

Did you incur any medical expenses?
Canadians are generally eligible for a tax credit (16 percent in 2003) of a portion of their medical expenses. There is a long list of expenses that are eligible, which include private health and dental plan fees. However, the eligibility amount is reduced by the lessor of $1,755 or 3 percent of your net income.

Although these questions are only a start, they should give you a good idea of how important it is to provide your accountant or tax preparer with the information he needs to complete your return properly. If you don't, you could end up paying a lot more income tax.

Peter Diekmeyer is the Montreal Gazette's management columnist.

-- Posted: Apr. 5, 2004
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