OBSERVATIONS FROM 2013 TAX SEASON

Here are some thoughts after completing the 2013 tax season - things that I observed, deductions missed, and how to avoid making these mistakes in the future.


AN EASY WAY TO RECORD DEDUCTIBLE EXPENSES

An easy way to record and keep track of tax deductible expenses like employment or business related expenses is to first make a copy of last year's tax schedules. Then all you need to do is accumulate your receipts in the same order and then write the total down beside last year's number. This helps your tax preparer because he or she doesn't have to guess about how to classify the expense and it's very easy to enter the expenses when they are in the same order. Furthermore, this helps both preparer and you compare this year's total to last year's total for reasonableness and completeness. Comparing this year to last year is my favourite way of catching errors and omissions.

REDUCE TAX PREPARATION BILLS BY BEING BETTER ORGANIZED

Here are some quick ideas to reduce tax preparation paperwork to reduce your tax preparation charge:

  1. First use the idea to above to reduce the effort in recording deductible expenses.
  2. Get expense summaries whenever you can - for example, drug stores will provide a print out of all your drug claims, health insurers generally have online summaries and fitness organizations can provide summaries too.
  3. Provide fitness credit info by child rather than detailed bills (but if in doubt, include the bill).
  4. Do not include Ontario Trillium or HST statements - these are not needed.
  5. Consider having your tax package printed as a PDF document - go paperless!

UNDER-DEDUCTION AND DISORGANIZATION

I have tax preparation clients, I'll call them Frank and Connie.  In our initial meeting I asked Joe and Connie for their tax returns going back 5 years because I suspected that they were under-deducting their investment loan interest.  Turns out I was right, to the tune of about $8,000 in missed deductions. One of the problems is that they were using a line of credit for both personal and investment loans.  Although this technically does not affect the deductibility, it makes detailed record keeping essential. You have to have documentation to support each investment loan advance and you have to allocate the interest in a reasonable and supportable manner between deductible investment loan interest and non-deductible interest.  Because of this, I had to get every investment account going back for years (there were 3 separate accounts!), and link every new cash addition to the line of credit statements (2 different lines of credit!).  All of this of course results in a fair bit of avoidable billable time on my part so the lesson here is to keep good records and ideally involve a tax professional at an early stage.

DISABILITY TAX CREDIT WHEN APPROPRIATE

Aging can be an unpleasant experience, and particularly if we experience serious deterioration.  So the only small silver lining is that we may get to claim a Disability Tax Credit. In order to do this, we need to submit a T2201 Disability Tax Credit Certificate to a medical doctor who will sign this if appropriate. On a number of occasions, I've advised clients to obtain a T2201 when I became aware of their changed health. I won’t get into all the criteria, but among other things they cover being markedly restricted in speaking, hearing, walking, elimination, feeding, dressing and mental functions.  For 2013, the credit was $7,697 which is worth about $1,100 in tax savings.  In addition, with this certificate in place, you are able to claim attendant care expenses up to $10,000.  Typical seniors residence fees include an amount for “care expenses” which qualify as attendant care and these can be claimed on the medical expenses Line 330 on Schedule 1. And not just old people can benefit – car and other accident victims may qualify or people with early onset diseases like heart, stroke, cancer and dementia. If in doubt, submit the form to the medical personnel with the most complete knowledge of your situation.  If the condition started prior to the current tax year, the medical practitioner can backdate the form and then the previous year’s tax returns can be amended to reflect this.

EMPLOYMENT EXPENSES

Many employees may be eligible to claim these.  Tax form T2200 is completed by employers to describe their employees working conditions and for many, the employee may be entitled to deduct some of their otherwise personal expenses.  For example, many employees now spend a significant amount of their time working out of a home office. If this is expected by their employer, a portion of their home expenses may be tax deductible.  One of the questions on the form (#10) is: “Did this employee’s contract of employment require him or her to use a portion of his or her home for work?” Most employees don’t have formal employment contracts so it would be pretty easy to answer yes to this question.

I’ve also noticed that some employees have automotive allowances of which 100% is included in their T4 as a taxable benefit.  If you are in this position, it’s pretty obvious that the employer thinks you have business related automobile expenses.  If they include 100% of the allowance in your income, and you don’t claim any expenses, then you are saying you don’t have any business travel at all. If you do have legitimate business travel, and have a T2200 from your employer, then it is foolish not to go to the small extra effort of keeping good records of your automotive expense, business related mileage and total mileage.  Together with home office expenses already described, we could be talking about $10,000 or more in perfectly legitimate and supportable deductible expenses. For me, it’s been like pulling teeth trying to get people to provide me with the numbers – it’s almost as if they actually like paying more tax.

Commission employees have additional kinds of expenses that they can deduct like: accounting, promotion, entertainment, home insurance, and home property taxes.  I had one set of clients (I’ll call them Joe and Louise) and Joe had commission income.  I said to Louise: “Doesn’t Joe have any commission expenses?”  She replied: “Yeah, sure he does – he sent an expensive gift out of his own pocket to one of his clients.”  That’s deductible folks!


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Jonathan Flawn, financial advisor, accountant, financial planner, business strategies, reduce taxes, debt reduction