In my opinion, this is potentially very costly and time consuming and I want to share with you my top reasons why.
1) You aren’t a tax expert
Taxation and accounting can be a very complex issue. Accountants spend thousands of dollars and train for years to learn their skills. They also pay for ongoing education that helps keep them informed on the latest tax code changes.
In comparison, the average investor has read a book or two on tax planning, and somehow they think they know how to do everything. The truth is they are nowhere near qualified to be a tax expert and they shouldn’t try to be.
Instead, investors should take the following 3-step approach…
- Hire a skilled accountant to handle the taxation aspects of their investing business
- Learn enough about taxes and accounting so they can understand what their accountant is doing and read financial reports
- Focus on what they do best – buying more property, and managing existing investments more profitably
2) Software programs aren’t enough
It amazes me that many people think that all they need to file a tax return is some inexpensive tax software.
Those software packages work great for people who have a regular job and perhaps a few stock or mutual fund investments, mainly because their tax returns are relatively simple and straightforward.
However, when you own investment property or own a business of any kind, the complexity goes up dramatically. There are all sorts of deductions available to you, with some of them being simple and others being a much more complex.
In addition, what all software lacks is information specific to your particular situation.
- Are you planning on selling a property in a few years? An accountant can help you plan ahead of time.
- Are you going to earn a lot of income this year, but not much next year? An accountant can help smooth out and reduce the taxes paid across both years.
Software can’t do that.
Most people think that just because they read something published on the CRA website in a tax guide, that it must be 100% true.
In fact, many investors treat CRA guides as ‘gospel’, assuming if they follow everything all the rules outline, everything will be okay and they will pay the least tax.
Unfortunately, that’s just not the case.
CRA tax guides and interpretation bulletins are a good learning resource, but you shouldn’t assume you’re a tax expert just because you’ve read a few of their publications.
Even though CRA does its best to explain what the laws are truly saying, if there’s ever any doubt, the law will always prevail.
Who decides what the law is trying to say? A judge in the tax court.
Which leads me to the next reason…
4) Tax court can ‘change’ the law
If there is ever a disagreement between CRA and a taxpayer over something the taxpayer thinks should be allowed (e.g. a deduction), the taxpayer can bring the issue before the Tax Court of Canada.
In Tax Court, a judge hears both sides of the issue – both from CRA representatives and the taxpayer. At that point, the judge makes a decision.
The results of those decisions are published on the Tax Court website, and good accountants will keep up-to-date on the latest judgements so they can correctly advise their clients.
An investor who tries to do their own tax planning and tax returns will likely never know (until it’s too late) that a recent court case has ‘changed the rules’ for their particular situation.
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5) Do-It-Yourself is Expensive
My accountant told me the story of one client of his who owned many rental properties, and he had been doing his own tax returns for the last 5 years.
When my accountant looked at his returns, he realized that his client had made a big mistake. He had forgotten HALF of his property expenses, which caused him to pay MORE taxes for each and every year he owned his properties.
Fortunately his client was able to go back and adjust the previous tax returns, but if he had never hired an accountant to help him with his taxes, he may have never known.
He might have continued overpaying by thousands of dollars for many years, on both existing properties and new purchases… all because he thought he knew how to prepare his tax return.
If you don’t yet use an accountant for tax planning and to prepare your tax returns for your investment properties, I highly recommend you reconsider.
The cost is insignificant compared to the savings you’ll receive, along with the peace of mind knowing that your tax returns are being done properly and you’re maximizing your tax savings.