Annual Income Tax Supplement

Advisors' Federal Income Tax Returns (2013) This bulletin is designed to help Advocis members file their own income tax returns. It has been updated for the 2013 taxation year. Revisions to the tax information in this year's bulletin have been underlined for easier identification. The bulletin covers the income tax treatment of common "business" activities of an insurance and financial advisor. As individual taxpayers, advisors will also have other inclusions, deductions, credits and so forth. Each advisor is responsible for ensuring complete and accurate reporting of all income tax-related items on his or her own individual income tax return. Preparation Advocis suggests you review this bulletin and obtain the appropriate Canada Revenue Agency (CRA) guides, forms and interpretation bulletins (referred to by their IT numbers) before you begin preparing your income tax return. Especially helpful are the tax guides entitled Employment Expenses (T4044) (for employees) and Business and Professional Income (T4002) (for self-employed individuals). Most tax guides are revised every year; use up-to-date guides only. CRA publications can be obtained free of charge from tax services offices (in person or by telephone) or from the CRA website at www.cra.gc.ca. (If you are unable to find a particular item, be sure to check the Income Tax Folios section of the website, which is being transitioned to replace much of the existing reference material.) You must file a T1 General return if you are reporting commission income or claiming employment or business expenses. You can get both the 2013 T1 General Forms package (customized for your province) and the General Income Tax and Benefit Guide 2013 from a post office or tax services office. General rules Your tax treatment depends on whether you are an employee or are self-employed, and on whether you receive commission income. Employed/self-employed determination The initial responsibility for determining the nature of your relationship rests upon you and the company(ies) you represent. The CRA issues a guide entitled Employee or SelfEmployed? (RC4110) that sets out factors to be considered. Note that the same status will apply for income tax, Canada Pension Plan and Employment Insurance purposes. Where a question or dispute arises, you may request a ruling on the status of your relationship from the CRA. Also note that an advisor may be employed by one financial institution and maintain a self-employed relationship with another institution. Employed advisors As an employed advisor, you earn employment income. In order to claim expenses, both you and your employer must complete Form T2200 (Declaration of Conditions of Employment). This form must show that you are normally required to carry on your employment duties away from your employer's place of business and that you are required under your employment agreement to pay your own expenses. Form T2200 need not be submitted with your return, but you must complete a new one each year and keep it on file. Form T777 (Statement of Employment Expenses) must be filed with your return. The Employment Expenses guide contains both forms. You can also print them directly from the CRA website. As an employee, you must generally file your income tax return for the prior year by April 30. If your spouse or common-law partner is self-employed, however, your filing deadline is June 15. Any tax owing must be paid by April 30 to avoid interest charges.

The amount of an expenditure includes any sales taxes you paid. The types and amount of expenses you can claim depend in part upon whether you receive commission income. Salary-only advisors: As an employee who does not receive commission income, you are generally entitled to deduct the expenses listed under items 1 to 7 below. However, if you receive a non-taxable allowance for motor vehicle expenses or for travelling expenses, you cannot claim the respective deductions under items 1 to 3. Commissioned advisors: As an employee who receives commissions (either alone or in combination with salary), you are entitled to deduct the amounts listed in items 1 to 21 on the next page. However, if you receive a non-taxable allowance for motor vehicle expenses or for travelling expenses, you cannot claim the respective deductions under items 1 to 3. Note that the total amount deducted under items 2 to 21 must not exceed your commission income for the year. If the total of items 2 to 21 does exceed your commission income, it might be better to claim the deductions available to employees generally. You may then claim only the expenses available to non-commissioned employees (i.e., items 1 to 7 as described above), but your claim is not limited to the amount of your commission income. See the Employment Expenses guide for an example. Self-employed advisors As a self-employed advisor, you earn business income. The CRA encourages you to file Form T2125 (Statement of Business Activities) with your return. This form is included in the Business and Professional Income guide. It can also be printed from the CRA website. Self-employed individuals have until June 15 to file their income tax returns for the prior year. However, any tax balance owing for that prior year must be paid by April 30 to avoid interest charges. Self-employed advisors are eligible to claim all of the applicable expenses listed in items 1 to 28 on the next page. The amounts expended will include sales taxes, except to the extent you have claimed input tax credits on your expenditures. Deductible items Regardless of your employment status, a few general rules apply to all expense claims. • You must have spent the amount (and not been reimbursed for it) for the purpose of earning commissions or other income. • The amount must be reasonable in the circumstances. • You must keep proof of the expenditure (see "Keeping records"). The following list of deductible items is general in nature. Consult the relevant CRA guides and interpretation bulletins for additional information. There may be restrictions and requirements specific to your circumstances. All financial advisors, whether they are self-employed, or salaried or commissioned employees, may deduct the following: 1. Interest on a loan to purchase, and depreciation on, an automobile used for business purposes. Keep a record of the distance travelled for business purposes (excluding driving between your home and office) and the total distance travelled for the year. Only the business-use portion of the following amounts is deductible: •

interest paid on money borrowed to acquire the automobile, up to a maximum of $10 per day for vehicles acquired after 2000. The limit is $8.33 for vehicles acquired after 1996 and before 2001; and

•

capital cost allowance (depreciation), calculated as explained in the Employment Expenses or Business and Professional Income guides. The depreciable cost of an automobile acquired after 2000 is limited to $30,000, plus sales taxes on $30,000.

Deduction limits for vehicles acquired prior to the dates noted above are shown in the tax guides. 2. Other expenses related to the operation of an automobile, including the business-use portions of: •

automobile lease charges (generally) of up to $800 (plus sales taxes) per month for vehicles leased after 2000. The limit is $700 (plus sales taxes) for leases entered into in 2000 and $650 (plus sales taxes) for leases entered into in 1998 or 1999;

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operating expenses, such as for fuel, oil, tires, car washes, insurance premiums, licences, maintenance, repairs and short-term rentals; and

•

the cost of parking for business purposes. This includes parking at the office for travelling advisors, but not for those who mostly work at the office and are not required to travel.

Keep a complete record of all expenses connected with your car, fully itemized and with receipts. Records of business and total use should also be maintained. For more automobile expense information, see the guides mentioned above and IT-521R (if you are selfemployed) or IT-522R (for employees). 3. All necessary business travelling expenses, including city transportation. Obtain receipts for hotel, airplane, train, boat, bus and taxi fares. The cost of travelling between your home and office cannot be deducted. Travelling expenses include 50 per cent of the cost of meals eaten while you were required by your duties to be away, for at least 12 hours, from the office's municipality and its metropolitan area. List automobile expenses separately (see 1 and 2 above). 4. Any expenses for office rent and office supplies (such as stationery, postage, business cards, printer paper and ink, street maps and directories) that you are required to pay. Business-related long distance and cellular telephone airtime charges are also deductible. You may be able to deduct capital cost allowance and interest paid on money borrowed to buy equipment such as a cell phone, fax machine, or a computer. 5. Any salary you are required to pay to an employee and any Canada/Quebec Pension Plan or Employment Insurance premium you are required to pay on behalf of your employee. (Guides and forms for the remittance of payroll deductions and T4 returns are available at your tax services office.) 6. Legal fees paid in establishing a right to, or in collecting, salary owed to you (IT-99R5 (Consolidated)). Per the 2013 federal budget, it may be possible to deduct legal fees paid to collect or establish a right to collect other amounts (paid after 2000) that must be reported in your employment income even if these amounts are not paid directly by your employer. 7. Expenses relating to your home office, provided that it is your principal place of business or that it is used exclusively for earning income and is used on a regular and continuous basis for meeting clients (IT-352R2). Eligible expenses include the business use portion of rent, heating, electricity, cleaning materials and minor repairs. For any year, the total

deduction for your home office expenses cannot exceed the income related to those expenses. Also, home office expenses cannot be used to create or increase a loss from employment. In addition, commissioned employees and self-employed advisors may also deduct: 8. The business-use portion of the leasing costs for equipment such as computers, cellular telephones, fax machines, photocopiers, etc. You may also deduct the basic monthly service charges for dedicated office telephone, Internet and e-mail services. 9. Legal and accounting fees related to earning income, including amounts related to establishing a right to or collecting commissions, and fees for preparing tax returns and appealing tax assessments. Various conditions apply (IT-99R5 (Consolidated)). 10. A reasonable portion of the property taxes and insurance premiums related to a home office. These expenses form part of the total home office expenses that are subject to the conditions and limits outlined in 7. 11. Business meal and entertainment expenses. Fifty per cent of the cost of business meals consumed and entertainment enjoyed is deductible. No deduction is allowed for membership fees or dues in any club whose main purpose is to provide dining, recreational or sporting facilities for its members. Expenses of a capital or social nature will also not qualify (IT-518R). 12. Commissions paid to an individual who is not your employee. No tax deduction, Canada/Quebec Pension Plan deduction or contribution or Employment Insurance deduction or contribution is required for such payments. Where amounts paid to an individual total $500 or more or where tax has been deducted at source, a form T4A must be prepared. The CRA guide Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary Form (RC4157) includes pertinent information. 13. Commissions on life insurance policies acquired for personal protection that you own and are obligated to pay for, provided that these commissions have been reported as income during the taxation year (IT-470R, paragraph 27). In the CRA's opinion, commissions on policies purchased for investment purposes, including annuity contracts and, more specifically, segregated fund contracts, are not deductible. Commissions on policies owned by a corporation are not deductible. If your agency is incorporated, and corporate documents stipulate that you are entitled to receive the commissions on your own personal-protection policies on a flow-through basis, then the commissions will be deductible to you personally. Any life insurance commissions deducted will reduce the adjusted cost basis of the related policy. [Claim the deduction on line 232 – “Other deductions” of the T1 General return.] Please note this item is in accordance with the CRA’s longstanding administrative position, as the deductibility of these expenses is not specifically mentioned within the Income Tax Act. On May 8th 2012, in response to concerns on the matter as a result of recent cases before the courts, the CRA has confirmed that they will not change their position as described in paragraph 27 of IT-470R. 14. Provincial licence fees and bond premiums. 15. Professional association membership fees, including Advocis, The Institute, CALU, FPSC and MDRT (IT-211R). 16. Subscriptions to magazines and other informational material relating to your work. 17. Any medical or underwriting fees, including fees for X-rays, heart charts or sugar tolerance tests, connected with the underwriting of client risks and actually paid by you.

18. Advertising and promotional expenses. This includes amounts paid for business cards, promotional gifts and advertisements. 19. Premiums for errors and omissions liability insurance. 20. Training and related expenses (including the cost of travel and lodging and the deductible portion of meals) you paid to maintain, update or upgrade skills or business and professional expertise (IT-357R2). 21. Other reasonable expenses related to earning commissions, other than those deductions available only to self-employed financial advisors (see 22 to 28 below). The following additional deductions are available to advisors who earn income from selfemployment: 22. A reasonable portion of the capital cost allowance and mortgage interest payments related to a home office. These expenses form part of the total home office expenses that are subject to the conditions and limits outlined in 7 above (IT-514). Note that the principal residence protection from capital gains does not apply to a work space for which capital cost allowance has been claimed. See the CRA Income Tax Folio S1-F3-C2, Principal Residence, for more information. 23. Bad debts incurred in financing premiums for clients, provided this is done in the ordinary course of business. Any amount subsequently recovered must be included as income when received. 24. Expenses you paid to attend up to two conventions related to your business. Such conventions must be held at a location reasonably consistent with the territorial scope of the organization. Conventions held in the United States by national Canadian organizations qualify for deduction. Where the fee for a convention does not segregate the charge for meals and entertainment, that charge is deemed to be $50 per day and, in accordance with the limits on such expenses, $25 per day will not be deductible (IT131R2). 25. Capital cost allowance claimed for the business use of a computer or other capital equipment. Eligible capital property allowance related to expenditures on goodwill and other intangible capital business assets. 26. Premiums for coverage under a private health services plan (PHSP) for yourself, your spouse or common-law partner and other household members. The rules and limits for this deduction are set out in the Business and Professional Income guide. 27. One-half of your Canada/Quebec Pension Plan contributions on self-employed earnings. (The other half qualifies for the CPP/QPP tax credit.) The deduction is calculated on Schedule 8 and claimed on line 222 of the T1 General return. 28. Other reasonable expenses related to earning business income. Tax credits available to advisors Employed and self-employed advisors may claim a tax credit for tuition fees paid for the LLQP, CFP, CLU and RHU courses, CLU seminars and life insurance schools conducted by Advocis, provided such fees exceed $100 for the year. Other courses may similarly qualify. You should receive Form T2202A (Tuition and Education Amounts Certificate) for qualifying

courses. The federal tax credit is 15 per cent of the fees paid. You may not claim this credit if such fees are paid on your behalf by your employer and are not included in computing your income (IT-470R, under "Employer-paid educational costs," and IT-516R2). In addition, you may be eligible to claim the textbook and part-time education tax credit at the federal credit rate of 15 per cent of $20 (for the textbook amount) and $120 (for the education amount) multiplied by the number of months of enrolment at a designated educational institution in a specified educational program. This information will be noted on Form T2202A for such courses. Contributions under new Employment Insurance (EI) measures for self-employed individuals (in effect since January 2010) are also eligible for a federal tax credit. Beginning January 2011, self-employed individuals can choose to pay EI premiums to be eligible to receive EI special benefits. For more information, consult the “Employment Insurance Special Benefits for Self-Employed People” topic on the Service Canada website. Keeping records The CRA requires reasonable proof for all income and expenses. Income: Keep an accurate running record of all income. The record should be clear and should reconcile to your income tax return. It should show all income earned during the year (net of chargebacks) by way of salary, fees, commissions, bonuses, allowances received to cover expenses and any other income earned as a financial advisor, including any amounts that are paid to you as advances against commissions. Expenses: Your record of expenses should clearly show that items have been entered concurrently with the expenditures. Each item should show not only the nature of the expense, but also its purpose — namely, that it was a necessary expense connected with earning the reported income. Obtain receipts wherever possible to support the amounts spent. You can obtain suitable expense record books from any business supply store for desk or pocket use; computer-based expense tracking programs are also available. Enter expense items at the end of each day and keep the records for tabulation at the end of the year and for inspection by the CRA if necessary. Remember that the tax assessor may request actual receipts to support expenses claimed and that tax records must be maintained for at least six years. Appealing assessments If the CRA disallows any of the items you have deducted and you feel the assessment is incorrect, you may contact the CRA office that issued the assessment to request clarification or correction. If the response is not satisfactory, you may file a Notice of Objection with the CRA within 90 days of the mailing of the Notice of Assessment or within one year of the due date of the return, whichever is later. If the CRA's decision is not in your favour, you may appeal to the Tax Court of Canada. Compiled by Advocis and issued for the use of its members in March 2014. This information has been updated with the assistance of George Logue and Cameron Mancell of the Invesco Canada Tax & Estate Info Service and Doug Carroll, vice-president, tax & estate planning, Invesco Canada Ltd. While Advocis makes every effort to ensure accuracy, this bulletin cannot cover all situations nor does it have authority in law. -30-