These are the common filing mistakes I’d like to share.
1. Fix errors from prior years . You can recover missed tax refunds and credits by filing an adjustment to prior filed returns up to 10 years back in the case of the federal T1.
Think about what lucrative deductions and credits might you have missed in filing past returns?
2. Report all income, the right way . Taxpayers make lots of mistakes reporting their income, from double reporting taxable benefits that are already included in Box 14 of your T4 slip to failing to report tips and gratuities. Common problem areas also include the reporting of foreign pensions and the interest your adult child paid you on the mortgage you are holding for him.
This year there are two issues of particular note for business people and real estate investors:
- Avoid the underground economy . Statistics Canada says the three industries most likely to participate in the underground economy are construction, retail and hotels and restaurants. If you are in these industries, CRA may want to review your filings, so make sure you can justify all income reported and all deductions claimed.
- Be careful flipping homes . If the home you sell is your primary residence, there is no tax paid on the sale. That’s right, the $50,000 gain on the home you bought for $500,000 last year and sold this year for $550,000 is tax exempt. But here’s the lesser-known trap: If you buy and sell those principal residences too often, you could face a tax problem. You’ll lose the principal residence exemption, and even the 50 per cent capital gains inclusion break if the tax department thinks you’re in the business of buying and selling homes.100 per cent of the resulting gains could be added to your income.
3. Missed capital losses : Don’t miss reporting your losses on your investments. They could be worth thousands in erasing capital gains of the current year. If you have no gains on this year’s return, know that you can use unapplied capital losses to wipe out taxes on capital gains of the prior three years or on future gains. That carry forward opportunity is indefinite. In the year of death, unused capital losses may be used against all types of income.
4. Pension income splitting . There are a variety of ways to cut the taxes on your pension income. You can assign half your Canada Pension Plan benefits to your spouse if you have both reached age 60, for example. That way you each report this income, hopefully at lower marginal tax rates. Up to 50 per cent of qualifying pension income from superannuation or RRSP/RRIF deposits may be split, too, with an election made each year. If you didn’t optimize, you can do so within a three-year adjustment period.
5. The most-missed tax deduction. It’s not the largest amount but many people miss claiming their safety deposit box. Over time, those missed deductions add up. This is especially true if you are a high income earner or if you are just over a clawback zone for OAS or Canada Child Tax Benefits. Investors should also review statements from their financial institutions to make sure interest costs and brokerage fees are claimed as carry costs.
6. The most lucrative deduction . This is serious money, so don’t miss out: Qualifying moving expenses include real estate commissions, which can run into the five figures. Again, moving expenses are subject to audit so keep all receipts. To make the claim, you have to move 40 kilometers closer to a new work or business location where active income is earned (sorry, but EI, pension or investment income doesn’t qualify).
7. The most lucrative tax credit. In my experience, that’s the Disability Tax Credit, claimed by someone who is markedly disabled on a permanent basis, or their supporting individual. Especially vulnerable are those with progressive diseases, like Alzheimer’s or cancer. A doctor or other qualified healthcare professional must fill in form T2201, the Disability Tax Credit Certificate. In many cases, the information provided by the healthcare professional may indicate several years of impairment. Previous tax returns can be adjusted for the tax credit for each year that the Disability Tax Credit Certificate has been approved by CRA.
8. The most-missed tax credit . The list is extensive and everyone has some, so why not find out more about claiming the medical expenses that you are missing? They can be grouped into the best 12-month period ending in the tax year. This year, you’ll be able to claim blood coagulation therapies and associated peripherals such as pricking devices, lancets and test strips if they are prescribed by a medical practitioner.
Those buying gluten-free products may make a claim for the difference in costs from regular products, and there are a host of claims for renovations you need to make to accommodate a disabled person with mobility issues. You will need to reduce the total by the lesser of $2,109 or 3 per cent of your net income, so it’s usually best to claim these costs on the return of the spouse with the lower income. An RRSP deduction can help increase this claim.
Remember, the trick to tax filing is to pay the correct amount of tax — but not a cent more. If you missed something, use the Taxpayer Relief provisions to get your rightful refund, claiming repetitive misses back over a 10 year period. But don’t procrastinate. Organized tax files and receipts, together with timely filings, will help you avoid costly errors.