You’ve sorted through a plethora of receipts, filed your taxes and are ready for a stress-free summer.
That is until you get a letter in the mail from the Canada Revenue Agency saying your return is under review.
It’s not a scenario that most Canadians want to end up in, however, it is one that can happen to anyone.
But what are the most common missteps that lead to Canadians getting their returns reviewed?
While the CRA doesn’t track statistics on the subject, Jamie Golombek, managing director of tax and estate planning at CIBC, offered his insights to Yahoo Finance Canada.
According to Golombek, the most frequent mistake made by Canadians is that they forget to include information from a tax slip or lose track of them altogether.
He said that this often occurs because a financial institution will have the wrong mailing address.
Golombek advised taxpayers to make sure they have slips for every mutual fund and bank account, and to compare what they’ve received this year to the year prior to ensure none are missing.
“Remember: the CRA has an electronic copy of every slip that was filed, so it’s very easy for their computer to match it up against what you were reporting,” he warned.
At first, Golombek said missing information would likely lead to a letter from the CRA asking for more information, a review of your return and possibly a reassessment for missing taxes.
But repeated incidents could lead to, in some cases, penalties.
Golombek said actual audits are “pretty rare.”
A spokesperson for the CRA told Yahoo Finance Canada in an email that returns that are reassessed for unpaid amounts are charged compound daily interest on any balance owing.
Golombek said taxpayers who file early are those who frequently make this mistake, as, even though most slips are issued by the end of February, some may arrive in the mail in March.
He said this is often the case with T3s, which report income paid by mutual funds, ETFs, income trusts and other investments.
Golombek added statements of partnership income, T5013s, may also arrive late into March.
Another area where taxpayers get tripped up and may incur unwanted attention from the CRA is in reporting their RRSPs.
Golombek said Canadians need to make sure if they’re not claiming all of their deductions and that they fill out the appropriate forms to carry forward unused portions of their RRSP contribution to subsequent years.
He said they also need to ensure they’re contributing within their limit.
Taxpayers also frequently make mistakes on their claims for tax credits on foreign taxes, according to Golombek.
He said one common issue is that exchange rates are calculated incorrectly (they need to be based on the average rate for the year.)
Meanwhile, income reported from the sale of foreign assets needs to be converted based on the rate on the date of the sale.
It may seem obvious, but another way taxpayers may put the CRA on alert is when they claim “questionable deductions,” said Golombek.
Line 256 on a tax return, which is labelled “additional deductions,” is where many Canadians take the opportunity to put down any kind of “miscellaneous deductions.”
However, Golombek said the criteria are actually very specific and anything put there “will be looked at in detail.”
Then there are the cases where people make claims that are simply not deductible.
This includes things child support payments, legal fees for divorces or separations, funeral expenses, wedding costs, loans to family members and losses on the sale of a home.
Other issues arise over questionable business expenses, such as claiming kilometers to and from the office, various non-qualifying medical costs like vitamins and supplements.
You can read more about expenses you may think are tax deductible but aren’t, in a piece on the subject by Yahoo Finance Canada from last month.
Reporting self-employment expenses and income
Properly filling out a tax return as a someone who is self-employed can be tricky, and those working for themselves should visit the CRA website and use “common sense,” according to Golombek.
He advised those in that situation need to make sure they’re not too “aggressive” in what they claim or they get caught.
He said self-employed taxpayers also have to enter an industry code on their return, which allows the CRA to compare their income to the mean.
“So, if you’re an electrician, if you’re a contractor, if you’re an accountant they look at that and see that type of income you’re reporting vs. expenses, and see if that’s normal and, if not, it stands out.”
“They have averages of what would create a red flag.”
Golombek said issues related to home-office expenses are a “huge” red flag, as the rules governing their claims are very strict, especially if you’re an employee.
“People are overly generous with, not just the percentage of the square feet that is their home office, but also the percentage of use of the home office is for work, because that’s also where they watch TV,” he said.
Golombek also said any issues related to rental income frequently lead to run-ins with the CRA.
He said any business or residential property that is reporting regular losses will get the CRA’s attention.
Questionable donations can also attract unwanted consideration from the CRA.
Golombek said the tax agency has pursued many people for making donations that are out of line with their pay-grade.
This type of activity can be an indication of a donation scheme. There have been cases where donation receipts have been sold for inflated values as part of gifting tax shelters.
Golombek said most interest can’t be claimed on a tax return. However, there are some cases if you borrow to invest, the loan is deductible.
So often for the first year that a taxpayer makes this claim, they will receive a letter from the CRA for specific details.
Overall, the best way to avoid getting the attention of the CRA, according to Golombek, is to be honest and reasonable on your tax return.
He also stressed the importance of maintaining good records, so you can demonstrate the validity of your claims and respond immediately if a letter from the CRA does end up in your mailbox.
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