Every year millions of Canadians pay too much in taxes by failing to file tax returns to their advantage and using all the deductions and credits that are available. Perhaps that’s because most of us have a love-hate relationship with tax season: we love our tax refunds, but hate the process we have to go through to get them.
We round up receipts at the last minute — if we still have them — or rummage around in the shoe box where we’ve tossed them all through the year. That’s where common tax filing errors really begin: call it awesome disorganization, if you will.
Unfortunately those tax season blues can manifest themselves into very costly gaffes at tax filing time, and there are year long consequences which can cost you a lot of money, too. Missed deductions can reduce lucrative Child Tax Benefits, or cause a clawback of Old Age Security payments. And, unless income from pensions, investments or business ventures can be reduced by deductions or planned income-splitting, the need may arise to make dreaded quarterly instalment tax remittances, reducing money available for investment.
I have answered thousands of tax questions on open line shows and online forums over the years. The most heartwarming story came from an exhausted widow who had heard me speak about the disability tax credit. Caring for her cancer-stricken husband over many years left little time to review tax savings opportunities. The recovered tax dollars came later, after adjusting returns filed earlier and correcting for the missed credit. The money helped to pay for funeral expenses, and cushion the effects of one lost old-age security pension for this lovely lady.
These are real-money moments, and they begin with reflection: what have you missed in filing past returns? With the average refund coming in at just under $1,500 — or $125 a month — just think of what you could do with the extra money:
• You could pay off expensive, non-deductible debt, like credit card balances.
• You could start saving within a TFSA — that’s the Tax Free Savings Account. It’s a great place to park money and earn tax free investment income for stuff you want, like a vacation or a car.
• You could save more in an RRSP: That’s important if you have taxable earned income. It can, in fact, create the new money to fund that TFSA contribution.
Okay, some of us will succumb to the pleasure of consumerism. (Oh well, at least it will stimulate the economy!) The point is, paying attention to common tax errors means more money in your pocket. After almost 30 years of questions, here’s what I can tell you:
Cash from your home sale. This is a common question: how much of the gain on the sale of my house is taxable? If it has always been your principal residence, none of it! Imagine buying a home for $400,000 and selling it a year later for $550,000. Yes, that’s $150,000 of tax free gains. But here’s the lesser known trap: if you buy and sell those principal residences for profit too often, you could face a significant tax problem. You might lose the principal residence exemption, if the tax department considers you to be in the business of buying and selling homes.
The most-missed tax deduction. It’s not the largest amount but everyone seems to miss claiming their safety deposit box. Over time, the missed deductions really add up, especially if you are a high income earner. Adjust those prior-filed returns for a little tax bonus.
The most lucrative tax deduction. Now this is serious money: qualifying moving expenses include real estate commissions, which can run well into the five figures in some cases. 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 EI, pension or investment income doesn’t qualify).
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.
You need to have a doctor or other qualified healthcare professional fill in form T2201, 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.
The most missed tax credit. Medical expenses. The list is extensive and everyone has some, so why not find out more about the medical expenses that you are missing. Remember to group your medical expenses into the best 12 month period ending in the tax year. You will need to reduce the total by the lesser of $2,024 or 3 per cent of your net income, so it’s usually best to claim them on the return of the spouse with the lower income. An RRSP deduction can help increase this claim.
Missed capital losses. In a post-financial crisis world this is really important. Don’t miss reporting your capital losses, even if you have to admit them to your spouse! They could be worth thousands, wiping out capital gains of the current year. If you have no gains, know that you can use capital losses to wipe out taxes on capital gains of the prior 3 years or on future gains, too. That carry forward opportunity, by the way, is indefinite. In the year of death, unused capital losses may be used against all types of income.
Give stock to charity. If you are like me, you probably like free money with which to help people, and that’s exactly what you get when you transfer securities to your favorite charity. So don’t make the mistake of selling your securities first for cash. Pick a worthy cause — lots to choose from —then transfer shares with accrued gains, for a much better after-tax result. You’ll avoid paying tax on those gains completely and you’ll get a donation receipt too. Check with your charity in advance to make sure that they are set up to receive your gift.
Missed babysitting deductions. Claiming the child care deduction can be complicated. Should it be the higher or lower earner who claims it? It depends, actually. Usually it’s the lower earner, but if there is a separation during the year, or the lower earner is going to school, or hospitalized, it possible the higher earner may make the claim.
But it’s not as easy as just using the maximums — $4,000, $7,000 or $10,000 —depending on the child’s age and health. The deduction is limited to the lesser of what was actually spent, your earned income (sorry, EI benefits won’t qualify) and certain weekly and monthly dollar limits specific to claims made by higher earners and students. Accuracy counts as babysitting costs reduce net income, which can increase the size of your Child Tax Benefits. Keep receipts handy, too, in case of audit.
Remember, the trick to the whole tax filing exercise is to pay only the correct amount of tax — not a cent more. If you missed a lucrative provision, use the Taxpayer Relief provisions to get your rightful tax refund, claiming repetitive misses back over a 10 year period.