Common Mistakes People make on their tax return
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Common Mistakes People make on their tax return

 
 
 
Common Mistakes People make on their tax return
 
 
 
 
Written by Jim Yih
Common Mistakes People make on their tax return
 
It’s tax time again and the deadline to file your return is just around the corner. At one time, I did my own tax returns and to be honest it was one of the best ways for me to learn about tax planning. Unfortunately, things have gotten a lot more complicated and busy so now I use an Accountant to prepare not only my corporate returns but also my personal returns. Since I don’t do my own returns, I asked a Chartered Accountant, Michael Oseen, Manager in Tax Services at Grant Thornton LLP to provide some insights into some common mistakes that people make on their returns.
1.       Claiming of expenses on employment income. According to Oseen, “Far too many times, people try to deduct expenses which they are not legally entitled. It’s one thing to try to maximize your deductions but sometimes they stretch it too far.” Remember that in order to claim employment expenses, your employer must require you to incur these expenses and they will complete a T2200, Declaration of Conditions of Employment.
2.       Not reporting common law living status. When living common law with a significant other (which includes same sex couples), individuals are required to file as common law and receive the same treatment as a married couple. Oseen believes this can sometimes be advantageous given the ability to claim a tax credit for a low-income partner.
3.       Employer vs. Employee status. Some businesses like to “contract” individuals instead of employ them to get around paying EI, CPP and other benefits, If there is too great a connection between the contractor and the business, Canada Revenue Agency (CRA) can take the view that the contractor is actually an employee and charge penalties and interest on EI and CPP withholdings not made.
4.       Claiming interest expense. Generally interest expenses can only be deducted if there is a direct linkage between the borrowed funds and an increase in the ability of the taxpayer to earn income. A loan that is used to buy investments directly will have deductible interest, but a mortgage that was used to buy a house instead of cashing in investments to buy the house does not have deductible interest.
Oseen offers some great words of wisdom for completing your tax returns. Firstly, keep detailed information to support every amount you claim on your tax return. In the event of a review or an audit by CRA, this can take all the hassle out of what is usually an unpleasant situation. Also ensure that all of your slips are claimed because CRA get copies of all slips issued by Canadian resident corporations. If you do not claim a slip, they have the ability to assess a penalty and charge interest. Oseen speculates that CRA is going to enforce this rigorously this year.
Whether you do your own taxes or hire a professional, it’s so important to have some understanding the Canadian tax system. The problem is it’s anything but simple or easy. Not only are there too many rules to keep up with, but the rules keep changing every single year. This year is no exception.
My fundamental belief is that people spend more time worrying about finding ways to improve their investment portfolios by 1%, 2%, 3% or up to 5% over time and while that may be good value, good tax planning can benefit you by 10%, 20%, 30% and up to 50%. Tax planning is very different than tax preparation in that tax preparation is about summarizing the historical events of the past year. Tax planning is about finding ways to minimize tax in the future years. Remember that preparing your returns this year can be the best start to planning strategies to reduce tax for next year. Good luck!
 
 
 
 
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