Young man, scratching his head in frustration over taxes.Michal Kowalski
Shari Stolpmann is paying $9,000 a year for her 19-year-old daughter to study firefighting at an Ontario college. But when she files her taxes, she will only be able to claim a tax credit of $5,000 from her daughter's school costs - which in Ontario will lead to tax savings of around $1,000.
Despite soaring tuition and the slew of other school-related costs, Canada Revenue Agency (CRA) rules state that children who are attending school and not claiming a school-related tax credit for themselves can transfer up to $5,000 in tuition and education costs to a parent.
Ms. Stolpmann, a chartered professional accountant and a partner at Beckett Lowden Read LLP in Burlington, says this $5,000 cap is something that frustrates many of the parents she works with at tax time.
Another complaint she hears when people's children go to college or university: When students rent a place on their own, they can claim 20 per cent of their rent as their occupancy cost – but when they live in a residence at the school, they get only a $25 tax credit. "Everyone knows residence costs a lot more than that," Ms. Stolpmann says.
Mark Goodfield, a tax partner at Toronto's Cunningham LLP and the author of The Blunt Bean Counter blog , says a common head-scratcher among his clients is why spouses can't file joint tax returns.
New parents often wonder why child-care expense tops out at $7,000 a year per child, when many are spending thousands of dollars more than that, he said. "Overall, a lot of the deductions people feel do not reflect the cost of society. When you can transfer $5,000 in tuition, and your kid's tuition costs $25,000...well, that doesn't make a lot of sense to them."
Many of these questions have no immediate answers, said Mr. Goodfield. "This is just public policy."
During his 25 years in the tax field, he has heard it all. He put together this list of top 10 things that clients have told him don't make a lot of sense when it comes to income tax:
1. Why can't spouses file joint income tax returns as is permitted in the United States? It would equalize income tax rates, simplify our tax system, reduce the administrative time required to prepare and process personal income taxes and reduce the amount of paper the CRA receives each year.
2. Why are parents only allowed a transfer of $5,000 of their child's unused tuition, education and book credits? The parent is often the one who paid the costs of tuition. This cap should be re-evaluated in the wake of rising tuition costs.
3. If I received an actual dividend of $1,000, why do I report $1,380 on my tax return? "This is probably the most common and confusing question for my clients," Mr. Goodfield says. The reason for the extra $380 is the dividend gross-up. The purpose of the gross-up is to bring the dividend back up to the amount of money the corporation earned before it paid corporate tax. The corporate tax is reflected as the dividend tax credit.
4. Why must child care expenses be claimed by the lower-income spouse? The motivation behind the child care deduction is to get people with children back to work to help drive the economy. In the case of this rule, the child care deduction is based on two-thirds of the earned income of the lower-income spouse. Often, the deduction is constrained by that spouse's income. If the deduction was based on the income of the higher-earning spouse, the family could often get a larger child care claim.
5. When one spouse has a tax refund and the other owes money, why can't you net the refund and tax payment against each other? Again, this would simplify our tax system and reduce the administration and paper work for the CRA. "Whether it makes sense or not, this is a common complaint," Mr. Goodfield says.
6. Why are people loath to realize a capital gain on an investment because they will have to pay tax on the gain, subject to a maximum rate of 23 per cent? Often individuals wait too long before selling and end up converting what would have been a capital gain into a capital loss. A case in point, Mr. Goodfield says, are individuals who held shares of Nortel too long because they did not want to pay the tax.
7. Why do people pay no attention to the RRSP contribution limit information on their income tax assessments when planning their contributions for the year? An individual's RRSP contribution limit for the upcoming year is printed right on the Notice of Assessment for the prior year. It is also available on-line, once you register for digital access on the Canada Revenue Agency's website.
8. Why can self-employed people claim mortgage interest as a home-office expense while employees cannot? If you have an employer that requires you to work from home and they sign a T2200 form saying so, why should an employee's deductible expenses be restricted in comparison to a self-employed person's?
9. Why can I deduct my car expenses when I drive directly to my client's office from my home – but when I drive to my own office to work with the client via teleconference or telephone, why is the mileage considered personal? "You are discussing the same issue with the same person but one is deductible and the other is not," Mr. Goodfield says of this common complaint from people he has worked with.
10. Why is the maximum childcare expense set at $7,000, when the monthly child care cost far exceeds $1,000 in many cities? It drops to $4,000 for children aged 7 to 16. "People, especially in major metropolitan cities, find that the cost of child care far exceeds the limit. I am sure there is a reason why it is set here, but I certainly do not know it," he said.