Written by Brenda Warner, CA, CGA
A Companion Advisor article

It is said that timing is everything. This can be true in the taxation field as well. At the head of the list of time-sensitive tax related matters is the filing of income tax returns.

As soon as a return is late, the penalty is five per cent of the unpaid tax, which means that for a return showing $5,000 owing, being late by a day will cost the taxpayer $250. The penalty increases one per cent a month for the next 12 months and increases in severity for repeat offenders (10 per cent immediately, plus two per cent per moth for 20 months).

Trust returns are due 90 days after year end (not three months); corporate returns are due two or three months after year end (depending on the nature of the return); returns for deceased individuals and their cohabiting spouses are due the later of six months after the date of death or the normal due date following the year of death; returns for other individuals are due April 30th following the taxation year or June 15th if the taxpayer or the taxpayer’s cohabiting spouse carries on a business. Other than by filing on time, this penalty can be avoided by paying the taxes owing by the tax return filing due date.

Most elections have strict due dates and many have relief from those due dates in the form of late-filing penalties. For example, an election for a Section 85 Rollover is due by the first income tax return due date for the parties involved in the rollover. However, it can be filed late if an estimate of the penalty is included with the election. The penalty is the least of ¼ per cent of the fair market value (FMV) less the elected amount for each month or part month that the election is late, $100 x (times) the number of months and part months that the election is late and $8,000. For an election that is 24 months late involving assets having a FMV of $1,000,000 and an elected amount of $300,000, the penalty would be $2,400 (the least of ($1,000,000 - $300,000) x ¼ per cent x 24; $100 x 24; $8,000). The alternative to paying this penalty is to pay the tax on the disposition of the transferred asset(s), using FMV as proceeds (plus any interest assessed as a result of late payment).

Another election with a late filing provision is the election for a capital gains dividend. The election is due before the dividend is paid, but can be filed late if the penalty accompanies the late-filed election. The penalty is the lesser of one per cent of the dividend per month or part month between the date the dividend was payable or began to be paid and the date the election was filed, and $500 times the number of months or part months previously calculated divided by 12. For a dividend of $60,000 for which the election is 12 months late, the penalty is $500 (the lesser of one per cent x $60,000 x 12; $500 x 12/12). The alternative is to have the recipients taxed as if the dividend that they received was a taxable dividend rather than a capital dividend.

Remittances of employee deductions are due at a variety of intervals and dates, depending on the size of the average monthly remittances (the possibilities too numerous to list here). The penalty for non-remittance by the due date is 10 per cent of remittances that exceed $500.

Filing tax returns and elections and making payments are obvious date-sensitive actions, but there are other actions that require adherence to or consideration of dates as well. For example, a capital gains dividend is based on the total of the capital dividend account (CDA) immediately before the dividend becomes payable or begins to be paid. Any capital losses incurred before that time permanently reduce the CDA and prevent the tax-free receipt of the capital dividend for a previously realized capital gain. If a capital loss is anticipated, capital gains dividends should be declared before the loss is realized, to prevent the reduction of the capital dividend account.

Capital gains and recapture can be deferred on certain dispositions if the replacement property is acquired within specific time limits. For property that is stolen, destroyed or expropriated, the time limit is by the end of the second taxation year after the disposition of the property. For a former business property (e.g., land and/or building used to earn business income) that the owner sells voluntarily, the time limit is one year after the end of the taxation year of disposition. There is no room for playing with the disposition date for the involuntary disposition, but where an owner voluntarily sells a former business property, the date of closing should be watched if it is near the year end. By moving the closing date to a day after the year end, the taxpayer receives nearly an additional year to replace the property.

A similar result is achieved by watching the timing of contributions to a spousal RRSP. Everyone knows that contributing to an RRSPs early—instead of the following February—ensures the earnings for that time are earned inside the RRSP. If you contribute to a spousal RRSP, contributing in the calendar year instead of the following two months make sense for another reason: Amounts from a spousal RRSP are taxed in the hands of the contributing spouse if they are withdrawn in the contribution year or the following two years. If the contribution is made in December, rather than the following January or February, the time that the contribution must remain in the spousal plan is reduced by almost a year, with no change to the timing of the initial deduction.

Other actions taxpayers can take that are date-sensitive:

• Contribute to an RRSP by the end of the year in which the taxpayer becomes 69 years of age, rather than by March 1st of the next year.
• Time medical expenses so that two years of visits fall within a 12-month period, to take advantage of the "12 months ending in the year" rule.
• Time bonuses to take advantage of tax deferral without missing the 179-day deadline for payment.
• Ensure accrued rent, interest, etc., is paid to non-arm’s length parties within two years of the end of the year the amount became payable.
• Acquire depreciables a few days before year end, rather than a few days after.
• Ensure interest is paid on employee loans by January 30th of the year following the interest benefit.

If all of the above actions are taken they can save a little or maybe save as much as what would amount to double taxation. Whatever is saved occurs because of a day or some other measure of time.

Brenda Warner, CA, CGA is a past tax instructor at the University of Windsor and Wilfred Laurier University. She was the first course writer for two distance taxation courses for the University of Windsor, and continued in that function for more than 10 years. She is currently a professor of accounting at Conestoga College in Kitchener and contributor to "Statements", a CGA-Ontario.org publication.

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this article are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein. Readers should seek advice that is appropriate to their personal circumstances from a professional advisor.

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