(1) An elderly client set up a sizeable investment portfolio with a new investment advisor. Investment statements show "book value" (Note 1) and market value of investments… pretty standard stuff. However, the book value is based on the cost at the time the investments are transferred into the account. Capital gain statements are then produced annually based on these "book values", not the original costs of investments. The client passes away, leaving the spouse executor to deal with this.

Risk: Many clients (and some accountants) will accept a computerized investment company statement as gospel. Also CRA will undoubtedly reference it during an audit (Note 2). The investment companies do have fine print to the effect that the client is ultimately responsible for determining his or her original cost. But how many clients read the fine print?

Recommendation: Clients, accountants and investment advisors should work together when a new investment account is opened. I understand that an investment company wants to show information from the time they took over the account. However, from an accounting/tax view, it is more important to provide a trail for the original cost of an investment. Therefore the investment statement should reflect this.

(2) Client has large investment portfolio consisting of many diverse investments including trust units and mutual funds. Mutual fund companies provide capital gains/losses for dispositions of their funds and client depends on this for tax purposes. Although income trusts show book values on the investment statement, these figures cannot be relied on for income tax purposes. These investments require more detailed tracking because some distributions are taxable and others are returns of capital (nontaxable).

Risk: As mentioned earlier, the investment companies stipulate that the client is ultimately responsible for tracking the cost of their investment. Most clients do not want to pay their accountant to do this and they don't have the time or expertise to do it themselves. As investments become more complex, there is disconnect between who is tracking what. When investment companies/advisors change, tracking investment costs becomes even more difficult and time-consuming.

Recommendation: Clients, investment advisors and accountants should all be aware of these issues and communicate regularly to be sure that they are addressed as needed.

(3) Taxpayer with a large portfolio passes on. As most are aware, unless investments are transferred to spouse (not in this case), client is deemed to sell investments at fair market value at date of death. Capital gains and losses are recorded on the deceased's final tax return. During the next year, the Estate liquidates the investments. Capital gains statements are produced for the Estate showing gains based on the original cost (not the value at date of death).

Risk: The capital gains can easily be reported twice for tax purposes and both the deceased taxpayer and the Estate could pay tax on same gains. The capital gains statements produced by the investment company could raise questions with CRA (Note 2).

Recommendation: When capital gains are recorded on deceased's final return, Estate portfolio should be updated to show revised investment costs. Capital gains statements provided for Estates should reflect gains from date of death.

(4) As most are aware, when a taxpayer passes away, RRIF's can be rolled over to a surviving spouse tax-free. Investment company issues T4RIF for the withdrawal on death, but offsetting deduction form for the rollover goes missing. I have seen this happen more than once in my practice. The client usually blames the investment company, but I suspect sometimes in the stress of dealing with loss of spouse, things are mislaid.

Risk: If the rollover is not recorded, the taxpayer will pay tax on the RRIF withdrawals twice. Once when it is transferred out and again when regular withdrawals made.

Recommendations: Client should first of all consolidate RRIF's. Paperwork can be more problematic if client has multiple RRIF's with different investment companies. Investment companies could indicate on T4RIF that transfer is being made to the spouse under Section 60(L). I do see this sometimes but unfortunately, not consistently.

(5) Client transfers funds from registered pension plan into an RRSP. T4A is prepared to show pension plan withdrawal but regular RRSP contribution receipt is given to client. Two years later, when CRA questions, advisor who handled transaction is no longer in business and investment company says it does not have sufficient information to amend RRSP receipt.

Risk: CRA will assess on basis of documentation available. If investment company slip does not support taxpayer position, return will be reassessed. Client's RRSP contribution will be disallowed if he or she does not have sufficient RRSP room. Client may be charged penalty on "excess RRSP contribution".

Recommendations: Documentation errors should be followed up on timely basis. The only option (as far as CRA is concerned) is getting an amended slip. Transfers between registered plans should be clearly identified as such on both the withdrawal slip and supporting receipt.

(6) Client asks for capital gains statements for dispositions during the year. Investment staff prepares these for all accounts including RRSP's.

Risk: Of course, RRSP capital gains are not taxable until withdrawn. If client statements do not clearly identify RRSP accounts, the accountant can easily record taxable capital gains on these accounts also and tax is paid twice.

Recommendation: Investment advisors should be aware of this and ensure that RRSP accounts are clearly identified. This is not always the case.

(7) Client has diversified investment portfolio and receives a T3 investment slip showing significant foreign income. Tax return is filed showing that client has over $100K in foreign investments and that T1135 will be filed. It is later determined that these particular investment holdings are not subject to T1135 reporting.

Risk: The complications of filing T1135 are too detailed to discuss here. However, CRA wants details on foreign holdings (even those reported on investment slips). Failure not to report can result in significant penalties.

Recommendations: The investment and tax communities for the most part agree that the T1135 creates unnecessary work — the clients filing this form are not the ones taking their money offshore in suitcases. Hopefully CRA will eventually grasp this and adjust accordingly. At this time however, the T1135 is required and we have to deal with it. It is an opportunity for accountants and investment advisors to work together to come up with procedures that work efficiently for all parties.