#1 Doing it yourself when it comes to taxes
Income Tax is a Game, and the Rules are complex. There is a lot of money at stake when it comes to tax matters. Therefore it is always a good idea to seek professional tax advice. Remember, a good accountant is an asset, not an expense. Saving on professional help in this case simply means stealing money from your business or your family.
#2 If you claim to be self-employed you must be able to prove it
More and more Canadians fall into this trap every year – people who get “gross” cheques from their employers declare themselves self-employed only because the boss tells them that they are. If this is the case with you, contact your accountant immediately to see if you qualify. If you don’t, the consequences could be severe: the CRA will disallow all your “business” expenses, and you will have to pay EI, some extra taxes plus penalties and interest.
#3 Reporting income on Line 104
Be careful when putting any significant amount on Line 104 of your income tax return. In most cases the CRA will send you a letter asking for explanation. It is no secret that many business people try to avoid paying the CPP (and in some cases EI premiums) by entering their income on that line. Ask your accountant if you can report any amount on Line 104.
#4 Tuition, education and textbook amounts
People sometimes forget about Form T2202 which can be obtained from their college/university. You need to attach this form to your paper tax return in order to be able to claim tuition and education credit. This credit is transferrable between spouses. In case of children, if a student cannot use it (his or her income is too low and will not be taxed), the credit can be transferred to a parent or grandparent up to $5,000. In this case the student should sign the reverse side of the Form (sometimes people forget to do that). Schedule 11 should be filed only with the student’s income tax return, and not with the return of the individual claiming the transfer.
#5 Childcare expenses
Many new immigrants forget to pay their parents for babysitting their kids. Grandparents who are new to Canada normally have little and no income – and therefore in most cases this money will not be taxed in their hands. Also, don’t forget that child care expenses can include fees paid to gymnastics or other recreational activity for after-school classes. The primary reason for enrolling the child in the activity should be to allow a parent to perform duties of employment.
#6 Moving expenses
Expenses must be the result of moving at least 40 km closer to the new place of work than your previous home. Amounts are deductible against employment or self-employment income earned at the new location. The expenses should not exceed the taxpayer’s income from business or a job at a new location (you can deduct the unused part of those expenses from employment or self-employment income earned at the new location in the following years). You cannot deduct your moving expenses from any other type of income, such as investment income or Employment Insurance benefits, even if you receive this income at the new location.
The following are some examples of costs which are not deductible as moving expenses: expenses for work done to make your old home more saleable, any loss from the sale of your old home, or expenses for house-hunting or job-hunting trips before you move.
#7 Business expenses – rounding up the numbers and putting big amounts into one category
These mistakes are pretty common among small business owners. Unless you want to invite a CRA auditor into your office never ever round up your expenses. It just shows everybody that you are a lousy bookkeeper, and have no clue how to keep your records properly.
It is always a good idea to break your expenses down into multiple categories to avoid showing big numbers on any particular line. As long as your business expenses are legitimate and 100% deductible, it doesn’t matter where you claim them. For example, business cards could be claimed as promotional expense or office expense: CRA would allow the claim in both cases – as long as you have printed a “reasonable” amount of those cards.
#8 Charitable donations
Giving money to charities is a good and noble thing to do. But beware of the so called “tax shelters”: these are deals set up by savvy tax planners and lawyers who spot a loophole in the tax system. They can offer a big tax break, but are always challenged by the taxman. One current popular example is what is known as gifted trust arrangements that swell the value of your donation to charity through a complicated series of maneuvers. Anyone who puts their money into one of these charitable donation schemes is just asking CRA to put a red flag on their return. If your tax shelter is successfully challenged by the Canada Revenue Agency (which is the case for an absolute majority of those shelters), you can lose your deduction for that year. You will also almost sure face a penalty plus interest, and that’s not to mention the stress.
#9 Caregiver amount
Taxpayers (especially new immigrants) often miss this credit. Here are the rules:
If at any time in 2010 you maintained a dwelling where you and one or more of your dependants lived, you may be able to claim a maximum amount of $4,223 for each dependant. Most relatives who are 18 or over at the time they lived with you fall into this category if they were dependent on you due to mental or physical impairment. In case of parents the latter condition does not apply – but they should be at least 65 years old in the year you make a claim. With the exception of dependent children and/or grandchildren, eligible dependants must be a resident of Canada at any time in the year. Also, the dependant’s entire net income should not exceed $18,645 for 2010.
And finally, some additional remarks.
Many people do not keep proper documentation. According to CRA rules, you need to hang on to them for at least six years – though on practice CRA normally has only three years to contest your tax return. The CRA’s most common requests for documentation include moving and medical expenses, charitable donation receipts, proof of rental payments, T2202 tuition transfers, and proof that a child resides with a single parent when claiming an eligible dependent amount for the first time. Taxpayers should not throw important documents away.
Young people and new immigrants sometimes do not file a return because their income is under the basic exemption ($10,382 in 2010). However, the tax return needs to be filed in order to get back any income tax (plus part of CPP and EI, if applicable) withheld at source, receive provincial Sales Tax Credit and GST/HST credit. Also, this reported income will increase your cumulative RRSP deduction room. Some folks should file a return even if they have no income. Young people turning 19 before April 1, 2012 should file their 2010 tax return to get the GST/HST credit after their birthday. Students 16 and over in Ontario may be entitled to the $100 Ontario Sales Tax Credit if they are no longer living at home. Students applying for federal and provincial loans and bursaries will need to have filed a return to confirm their income.
New immigrants to Canada should also fill in CRA’s Form RC151 or write a letter stating their income for 2010 (before arriving to Canada) and attach this letter to their tax return. Otherwise, they will not be entitled for the GS/HST credit (which is based on net family income for the whole year).