Eligible income tax return prep/asst fees

Tax Topics
1

This is a new one for me. One of my clients just got married, and I am taking over the new spouse’s returns.

His previous preparer (Liberty tax employee) included the fee for doing his yearly return as an amount for Eligible income tax preparation/assistance fees on section IV of the S4.

He does have investments, T5008, T5s, etc. His portfolio is impressive, but but nothing unusual that won’t likely come in via AFR when available. Do others put their fees to prepare as a deduction here if clients have investments? I’ve been reading about this online for a while, but I’m having trouble finding a definitive definition of just what is “eligible income tax prep/asst fees” as a carrying charge item.

Can someone point me to the correct item in the tax code so I can show him what actually qualifies here?

2

I always claim a proportional fee from total fees charged (depending on the complexity of schedule 4 and the amounts reported) as a deduction for my clients. in 46 years I never had an issue with this.

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3

If you are providing investment advice, analysis, or other services beyond tax preparation, the cost of those services are deductible from investment income. The cost of tax preparation is not deductible, but I’ve seen or heard that many tax preparers still include their “tax prep” fees on S4. If the client has no investment income (or losses), CRA is quick to deny that deduction. But, otherwise it’s not often questioned (at least in my experience).

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4

I concur with @Nezzer on this. The only additional point I will add is that when I do add an amount for Investment advice, analysis, or other services, I refer back to the invoice I issued in the tax year I’m working on (ie: invoice issued in 2023 for 2023’s taxes). The work I’m doing and invoicing on the file this year will be claimed on next year’s taxes when we file 2024’s taxes.

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5

Thank you! The closest I come to investment advice is to discuss how specific things will impact the return and to tell US clients about investments in Canada that are taxable in the states. I refer them to a financial planner otherwise.

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6

I occasionally have clients who investments in Bitcoin, or in silver and gold commodities, and they don’t always have the skillset to calculate their capital gains/losses based on the complexities with these investments. I claim my invoice for these analysis as a carrying charge on S4.

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7

Decades ago, my CGA boss always deducted the FULL fee (and gave me grief when I missed it). Others I have worked with claimed the full fee against rental or self emplyment income with some including spouse and dependent returns that had nothing to do with those types of income.

I have never had a review letter requesting support of the schdeule 4 fees, and assume it is not a CRA priority. However, it doen’t make it right.

8

I’ve seen that, too. But then, it is claimed on the T776 or T2125, not S4.

There was a seminar or presentation or article I read somewhere in the past, where CRA acknowledged that tax preparation for some proprietorships could be considered more complex than “normal”. If it could be argued that the taxpayer could not reasonably have prepared their own taxes, the tax preparation for the business would be considered a legitimate business expense. But, as always, use professional judgement…

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9

Haha, I guess it goes to show that just because you have a designation it doesn’t necessarily mean you know what you are doing.

10

LOL. I think he knew EXACTLY what he was doing - give the clients more deductions (as long as they are not likely to be questioned by CRA) so the clients will be less likely to complain about their bill (his firm’s fees). And even if they do, he can tell them that it will be deducted on their taxes…if they come back again next year.

On the other hand, I would say it was a breach of the CGA code of ethics, but what would CGA have done about it? Probably just issue a reprimand and advise him to stop doing that.

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11

Yes cheating…

12

So are you saying that CGAs should just do whatever the F they want because the repercussions are minimal?

I think if you know something is wrong and go ahead anyway that is serious. If you are just stupid that can be excused.

13

No. Quite the opposite.

Of course, CGA no longer exists, but this applies to all designated accountants, and even un-designated accountants who are members of a professional organization (PBA, RPA, ATAP, etc). They all have a code of conduct, including ethics. Members should hold themselves to it. But, how often have we seen such breaches, and the organization does nothing about it, or just gives a slap on the wrist? It’s difficult to prove. So, unscrupulous accountants continue to get away with it.

14

Yes I include the fee on S4, provided the investment income is substantial and especially if I have to calculate adjusted cost base or prepare a T1135. A tax return with investments, specifically foreign investments, can be significantly more work than a basic tax return and quite difficult for the average person to do on their own.

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15

This turned out to be an interesting discussion. Thank you! Things that include unusual or excess work makes sense to me. Most of the time investments match AFR so well it doesn’t take long, if any time at all, to reconcile them.

There are some that I spend a lot of time on to get to the final numbers. Similar to small business clients who bring a box of unorganized receipts or my day trader with his paperwork mountain, I usually add an hourly fee for the excess time it takes me to do their returns. Including that part of my fee on their S4 makes total sense.

I do the same as @kozakworld for including accounting fees on business schedules. I’ll do the same with this fee when I charge it.

16

Indeed it has turned out to be an interesting discussion.

I disagree! A lot of talk in this discussion about “correct way” vs practice but the “correct way” to calculate the ACB of a Foreign stock is to use the weighted average exchange rate of the dates in which the stock was PURCHASED, not necessarily the exchange rate when it was sold. If the T5008 is in USD, this could require going back to trading summaries from many years ago. It’s a lot of work to do it correctly. I have heard of a lot of accountants just using the current year exchange rate for cost base which is wrong and ignores the exchange gain/loss component of the transaction.

I also have to do a thorough review of all their holdings to ensure that the COST of specified foreign property in Canadian dollars did not go over $100k in the year. This is why I charge more for people with foreign investments and why that fee is deductible.

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17

I think most of the replies here are far too conservative, and assume that CRA restricts the deduction of tax preparation fees far more than is actually so. What is reasonable is always debatable, but once the return includes business, professional, commission, rental, or investment income, it is arguable that the taxpayer should engage professional assistance. It is also arguable that once a taxpayer engages a professional preparer, it is reasonable to have that person prepare the whole return (and, I would further argue, those of the spouse or common-law partner and dependants) not just one or two schedules. The following are some excerpts from CRA’s website (I will not go into fees for representation in an audit or appeal, which are clearly deductible):

Re T1 line 22100:

Claim the following carrying charges and interest that you paid to earn income from investments:

[R]easonable fees, that have not already been deducted, to have someone prepare or assist you in filing your return if you have income from a business or property (see consolidated and archived Interpretation Bulletin IT-99R5, Legal and Accounting Fees)

[Also see the definition of property in subsection 248(1) of the Income Tax Act. - K]

From IT-99R5:

Income Tax Returns

Reasonable fees and expenses incurred for advice and assistance in preparing and filing of returns for income tax purposes are normally deductible by virtue of section 9 and are not limited under paragraph 18(1)(a) in computing business or property income to which such tax returns relate. A taxpayer who is employed in connection with selling property or negotiating contracts and who is entitled to deduct expenses pursuant to paragraph 8(1)(f) (see the current version of IT-522, Vehicle, Travel and Sales Expenses of Employees), may deduct a reasonable amount paid during the year to comply with the requirement to file an income tax return.

Re T776 line 8860:

You can also deduct expenses you had for bookkeeping services, audits of your records and preparing financial statements. You may be able to deduct fees and expenses for advice and help to prepare your income tax return and any related information returns.

Re T2125 line 8860:

Line 8860 – Professional fees (includes legal and accounting fees)
Deduct the fees you incurred for external professional advice or services, including consulting fees.

You can deduct accounting and legal fees you incur to get advice and help with keeping your records. You can also deduct fees you incur for preparing and filing your income tax and GST/HST returns.

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18

Thank you @keith1; I agree that some seem to be going overboard on what they refuse to claim for the clients. There is a ditch on either side of the road - we don’t want to push beyond what is ethical but I have no problem claiming my tax prep fees for any business or someone with invenstments. But then I don’t charge $400 to $800 per hour either.

19

Exactly. My fees include not only the preparation of the return but also the discussions around what income and expenses are taxable or claimable and advice about tax consequences of decisions.

If it’s a straight “download from AFR” then they shouldn’t be my client in the first place and I’ll send them to a lower cost provider or suggest self-filing.

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