Monthly Archives: October 2016

Small discrepancies

Last week I got a message from the Canada Revenue Agency about my own 2015 income tax. I did not read the main part. I went to the bottom line and saw that they wanted me to pay them 14 dollars. I know that I could possibly fight this assessment but it would take a lot of time and energy. In addition to that they might decide to question other items on my return. I sent them the 14 dollars.

For a long time I have told tax clients not to worry about small items like this. If there is a large difference of course I will look into it. If the amount was a couple hundred dollars I would spend a couple of hours going through their assessment notice to see if I could find out exactly what they were objecting to. Then I could decide what to do about it.

Last week Revenue Canada sent a letter to one of my tax clients. They specifically asked him for one information slip. It was for a withdrawal from an RRSP (the Canadian equivalent of an IRA but with a much higher contribution limit.) This was amazing because there were only 2 items on the information slip, the withdrawal and the tax withheld.

They did not ask about the withdrawal, only the tax withheld. The brokerage firm that held the RRSP send in their copies of information slips to the tax authorities electronically.  I had to conclude that there had been a glitch in transmission so that the tax withheld did not appear to be 25% of the withdrawal.

This is not supposed to be possible. The only time I have seen such glitches was when I wrote a C program and discovered that the villains in Redmond had filled their new operating systems with read errors. I could write a file whenever I wanted to and then read it when they wanted to let me read it.

I can’t help mentioning that one of my buddies came to see me the first season that I worked on income tax. He had received a letter asking about 3 specific points on his return from the previous year. He was badly rattled and seemed to be very frightened. I went through it with him and showed him that in each of the 3 cases there were some points in his favor. He seemed relieved. When he came to see me the next time he did not remember anything that I had told him, except that now he knew that there were some points in his favor on each one. We went through it all again and this time he paid more attention.



Donald Trump’s Income Tax Return

Some of the Democrats have complained that Donald Trump has stated that he will not release his current income tax return until after the audit is finished. I think that this is reasonable.

Someone found a copy of his 1995 return in which he showed a huge Net Operating Loss. The calculation of the NOL is complex and difficult. I have only prepared a couple of them. They often take a couple of hours to fill in. The corresponding Canadian form takes only a few minutes.

The concept of Net Operating Losses is to decrease the effects of varying income levels. A typical one would be for someone like a realtor who made money when real estate was moving in the early 2000s and had huge losses when the real estate market died, because he was still making the same advertising expenses. Companies in mining or oil exploration would have the same problems. The NOL permits taxpayers to decrease the tax on other years to compensate for the losses of the loss year.

People whose income varies from year to year are quite likely to use NOLs. Some examples are a newspaper, a grifter, and an angel investor. I specifically mentioned these because the New York Times, Hillary Clinton, and Mark Cuban all recently condemned Trump for using NOLs recently without realizing that they had done the same. I have no idea why Mark Cuban made such a stupid mistake. Until recently I thought that he was smarter than that.

I would not expect to see anything interesting in Trump’s tax returns in any case. Anyone buying real estate developments in the US has to form a new corporation for each project. If the address is 123 Main Street you would try to set up a corporation with a name like 123 Main Street Ltd.

This is necessary because there are huge numbers of lawyers who are looking for business and nearly all of them would be glad to get a chance to make a claim against a property owner. Many lawyers make a practice of filing trivial actions against companies like real estate owners in the hope of getting a quick out of court settlement. They typically ask for an amount that is significantly less than the cost of going to court.

Trump says that he does not pay off these shysters. He makes them go to court. If there was only one or two it would be cheaper to pay them off than to go to court. He takes the position that if he paid off one of them he would be besieged by trivial lawsuits.

As a sidelight here, Al Sharpton’s daughter filed a claim against New York City stating that she had sprained her ankle because she tripped on something on the sidewalk. She went ahead and posted photos on the internet of her dancing in high heels later the day of her supposed accident, and climbing a large hill or small mountain a couple of days later. How stupid can they get?

To take money from a corporation to an individual owner is not difficult. The company can pay a dividend, a management fee, a director’s fee, or some similar thing. All of these would simply go onto a form 1099 and these would be added up, either directly or on a schedule C.

In Canada it used to be necessary to have the owner of a private company receive a draw during the year. Near the end of the year the accountant had to figure how much was a salary and how much was a dividend. The objective was to select the distribution of income types to minimize the total tax bill. Similar calculations are done in the US. Naturally they are more complex when a large number of corporations are involved.

There is an additional complicating factor in Trump’s case. Because he has interests in a couple hundred corporations, some of these are probably treated as separate businesses and some of them consolidate the accounts of some other corporations, which are officially owned by the mother corporations instead of the shareholder. It requires some pretty fancy calculations to figure out the best distribution.

In summary I expect that when his 2015 return is published it will not contain anything interesting because it will only show the funds that went from his companies to his personal account. This will be quite close to his cost of living plus whatever additional amount he wants to put into his stock trading account.

If the Dems really wanted to know what was in his tax return they would instead look at the 104 pages that he filed a few months ago. One financial writer looked at this and found that Trump owned a large amount of shares in a particular company that did not fit in with his other investments. He looked at it, examined the company’s filings, and recommended that his readers all buy shares in it.

Saving Receipts

Some people will tell you that you do not need to keep receipts  for deductible expenses. This is not correct. The IRS or Revenue Canada may ask to see your receipts any time that they want to ask.
When they ask it is your duty and responsibility to provide receipts. If you do not do so they may completely eliminate the business expense. You could end up with a big tax bill. Most likely, if this happens, you will be audited for the next 2 or 3 years.

This brings us to the question of how to collect and categorize your business or employee expenses. The system that seems to be simplest is to put all of January receipts in one envelope, all of February in another and so on. This is not a very good system.

A much better system is to look at last year’s tax form and make a list of the types of expenses that are listed. Prepare an envelope for each one. Place the receipts in the appropriate envelope.  The reason for doing it this way is that whoever prepares your tax return will need to sort them into these categories. If they are already in the correct categories this is no longer necessary.

On some occasions I have spent a long time sorting office supplies from internet service etc. Once they are sorted I like to handle them in the easiest way, which is to take a batch of receipts for one thing and enter them all into an adding machine that produces a paper tape. As soon as I get to the end I wrap the tape around the receipts and put a few staples through the package. Then I write the name of the category on the tape and go on to the next batch. With a little practice this becomes very fast and easy to do.

I use the same system for adding up prescription receipts.

I am sending this to you now because I hope that you do not wait until the last minute to start preparing for your tax preparation.

A new feature this year is that the sales tax that you pay on large items may be deductible if you itemize deductions. The sales tax on an SUV may be a very large figure that would look really good on your Schedule A.