E&Y's Top 10 Tax Filing Tips
By Gena Katz, CA, CFP

Another year has flown by and believe it or not, it’s time to think about filing tax returns again. To help you through what many Canadians consider to be a real nail-biting process, here are 10 practical tax-filing suggestions for your consideration.

Some of the suggestions will save you time, some will save your nerves and—best of all—many will even save you money. So instead of approaching this year’s tax return preparation with fear and trepidation, take control, and be methodical. A carefully prepared tax return can mean great benefits for you.

1. Charitable donations
There are a number of filing opportunities relating to donations. The federal tax credit for donations is available in two stages. A low-rate credit is available on the first $200 of donations made in the year, and a high-rate credit is available on the remainder. Spouses and common-law partners can claim donations in respect of one another—it therefore makes sense for only one spouse to claim all of the family donations. A tax savings results because the low-rate credit is only used once.

Another way to benefit from the high-rate credit is to accumulate donations made over a few years and claim them all in one year. The donation credit is available for donations made within the five preceding years.

Remember that if you donated stocks, bonds or mutual funds, only 25% of the resulting capital gain must be included in your income.

2. Medical expenses
The claim for medical expenses is limited by an income threshold. In other words, the lower your net income, the more you can claim in eligible medical expenses. Because one spouse or common-law partner can claim medical expenses on behalf of the entire family, claim all expenses in the lower-income spouse’s return. But remember, this is a non-refundable credit and, therefore, the spouse who is making the claim should have sufficient income to absorb the entire credit. And if you cared for an elderly parent or grandparent or an infirm dependant in your home, you may be entitled to claim a caregiver tax credit.

3. Business owners
As a self-employed individual, there are a number of business-related expenses that you can claim to reduce the tax you pay. Ensure that you have taken advantage of all available deductions, including automobile expenses, parking, business association fees, home office expenses (if you qualify), entertainment, convention expenses (a maximum of two per year), cell phone, depreciation on your computer and salaries paid to assistants, including family members. Remember that in most cases, you can deduct private health-care premiums as a business expense instead of a medical expense and one-half of CPP paid in respect of self-employed earnings is deductible instead of creditable.

A word of caution: if you claim home-office expenses, you’re likely better off not to claim the depreciation on the home office portion of your home. Although this will give you a deduction in the current year, you will lose some the capital gains protection available from the principal residence exemption.

4. Old receipts you find may not be garbage
In gathering together your information, you may stumble across older receipts that still have value in your 2005 return. Specifically, charitable donations can be carried forward and used in any of the five years after the year the gift is made. And with respect to medical expense receipts, you can claim medical expenses for any 12-month period that ends in that year if they have not been claimed previously. In addition, under the fairness provisions, CRA has the discretion to make adjustment to previously filed returns (10 years back), in relation to certain errors or omissions, on request from a taxpayer.

5. Moving during the year
If you moved during 2005 to start a new job, a new business or go to university or college, you may be able to claim expenses relating to the move. In addition to the actual cost of moving your personal effects, you can claim travel costs, including meals and lodging while en route. Lease cancellation costs, as well as various expenses associated with the sale of your former residence, are also deductible, including up to $5,000 in costs associated with maintaining a former residence that was not sold before the move. The expenses are only deductible to the extent of income from the new work or business location and if this income is insufficient to claim all of the moving expenses in the year of the move, the remaining expenses may be carried forward and deducted in the next year.

6. Filing tax returns for children
It is often not necessary for your children to file a tax return, even though they may have earned income in the year. Nonetheless, in many cases it makes sense to file a tax return. If your children had part-time jobs during the year or have been paid for various small jobs, such as baby-sitting, snow removal or lawn care, by filing a tax return they report earned income and thus establish contribution room for purposes of making RRSP contributions. The contributions can be made in any future year.

Another advantage in filing a return for teenagers is the availability of refundable tax credits. Many of the provinces offer such credits to low- or no-income individuals. When there is no provincial tax to be reduced, the credit is paid out to the taxpayer.

7. Allowable business investment losses
If you’ve invested money in a small business corporation, perhaps to help a friend or family member get started, and all you have to show for your investment is shares or a note of a worthless corporation, you may be able to claim a loss on the invested funds. This loss, referred to as a “business investment loss,” is like a capital loss in that only one-half is deductible; however, unlike a capital loss, it can be claimed against any income in the year, not just capital gains.

8. Carryback your capital losses
Capital losses can only be applied against capital gains—and if you have a net capital loss for the year, it can be carried back three years and/or carried forward indefinitely, to be applied against capital gains realized in those years. If you realized a net capital loss in 2005 and have realized net gains in any of 2002-2004, file a form T1A to carry the loss back to those years and recover the related tax.

9. Use tax return preparation software
There are a number of inexpensive income-tax software packages available that you can use to prepare your tax return. These programs often provide step-by-step instruction and helpful tax-filing hints based on the information you input.

10. Consider electronic filing if you are expecting a refund
Electronically filed returns are generally quicker and easier to prepare and are less prone to mechanical errors. The processing time of electronically filed returns is substantially shorter than that associated with paper returns. If you are getting a tax refund, you can expect it within two weeks if you file electronically (as opposed to six to eight weeks for a paper return). Electronic filing options include Netfile, Efile and Telefile. In order to Netfile, you will have to use approved tax-return software. Alternatively, you can have your return filed electronically by using an approved Efile agent who will charge a fee for this service. Telefile is available for simple returns.

And here’s a bonus suggestion: Most people who report more than just employment income on their annual tax return can benefit from having the return prepared or at least reviewed by a professional advisor. Tax-return information can alert an advisor to a number of potential tax-savings opportunities that can provide benefits for many years to come.

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