Top 10 Mistakes to Avoid on Personal Tax Returns

Here are the top 10 mistakes that you need to avoid on your personal tax returns to prevent any unnecessary charges and penalties.

Claiming ineligible expenses on tax return

It’s common to get a little carried away while claiming deductions on your individual income tax return in Canada.

After all, they can reduce the load on the tax owing!!!

Here are some examples as mentioned by the Canada Revenue Agency (CRA) of claims generally made by Canadians that are ineligible.

Moving Expenses

If you are moving closer to your new workplace which is closer to your home by at least 40 km as compared to your previous home, then you can claim your moving expenses. You should however know that not all moving expenses are eligible. Moving expenses that are covered include travel expenses, transportation and storage, fees generated for cancelling a lease, and utility hookups.

Many Canadian taxpayers claim moving expenses even when they are not eligible. For once, not meet the criteria for getting closer to work, or if someone moves to Canada or moves out of Canada. 

Student Loan Interest

If you have taken a student loan that’s incurring a certain amount of interest, you can claim the interest amount.

Interest amount only, please! You can however make this claim only once and it has to be interest paid for student loans only. Some students make the mistake of claiming interest paid on personal loans, foreign student loans and student credit. Such claims are ineligible.

Medical Expenses

Although a lot of medical expenses can be claimed, there are some common claims made by Canadians that are ineligible such as expenses for vitamins, over-the-counter medications, and natural supplements. Some taxpayers go ahead and even claim cosmetic procedures as well. If the medical practitioner is not recognized by the provincial authority, the claim cannot be eligible.

Other medical expenses due to purchasing medical supplies like bandages, rubbing alcohol, shoe inserts, chair lifts, recliners, and non-hospital beds are also ineligible for the claim.

Not Reporting Foreign Income and/or Properties

Canada taxes its tax residents on worldwide income. Canadian resident taxpayers must report income from all sources, from inside and outside of Canada. Depending on the amounts of tax owing, this can be an expensive mistake or omission. 

Residents of Canada, certain trusts, and corporations who own specified foreign property worth more than $100,000 CAD at any time of the year are required to complete Form T1135 and submit it along with the income tax return. Failure to do this will lead to a penalty of $25 CAD per day for each day delayed up to a maximum of $2500 CAD for every tax year.

The CRA lists out what specified foreign property includes. 

In case you miss out on reporting, you can opt for the Voluntary Disclosure Program, which may be able to waive off some of the penalties provided you meet all the criteria for its eligibility.

Failing to update Marital Status

Although you are not married yet, you can still file as common-law partners, and you and your partner may be eligible for the tax benefits or tax credits that legally married couples are entitled to.

The CRA analyses the total income of both partners to determine which benefits are eligible and who should claim them. Some of the advantages of this scheme include a $5000 CAD Home Buyers tax credit (non-refundable credit) which can be split with your partner, combining receipts of medical expenses and charitable donations, and other benefits like Canada Child Benefit if you share a child either by birth or adoption.

If you report as single in your tax return, you may have to even return some of the amounts you receive. So, make sure that your marital status is reported correctly.

Always ensure, the correct marital status is checked on your tax return, as the software you are using may alter the calculations without you even knowing it. 

Not Transferring Tuition Credits from Dependants

If you are a student, you can carry forward your unused federal tuition, textbook and education amount to be claimed on your next year’s tax return so that your tax owing can be reduced.

Your carry forward amounts must be claimed in the first year that you are required to pay income tax.

You can also transfer a maximum of $5000 from the current year’s amount to a parent, spouse, grandparent, or a common-law partner, however, you cannot transfer the amount carried forward from the previous year.

The unused amounts that have been transferred cannot be carried over, so make sure that you only transfer the amount that is needed so that maximum of the unused amount can be carried forward.

Not Reporting Taxable Benefits

You must report all taxable benefits on your tax return. For example, CERB payments were made during the theCovid-19 pandemic. 

If you are an employer running a business and you are providing certain benefits to your employees such as health or accident insurance, you should make sure that you report these taxable benefits to the CRA and also accurately.

Failure in doing that will result in an increase in tax owing by the employees, which will thwart the purpose of providing benefits. Benefits such as medical and accident insurance are not taxable to your employees but other benefits such as parking, allowances, awards, gifts, transportation, life insurance, and stock options may be counted as taxable by CRA.

Not Taking Advantage of All Credits and Deductions.

A lot of tax credits and deductions go overlooked since the government often changes the rules year by year and it’s hard to take note of every single one of them. However, it pays to have knowledge of these deductions as you will end up paying more tax than what is due if you do not claim them.

Here are some tax credits and deductions you need to remember that are commonly overlooked. For example, student loan interest, union or professional dues, or first-time home buyer’s amount are some of the items usually missed. 

Not Reporting Principal Residence Sales

Capital gains from the sale of your principal residence do not require any tax to be paid for it if you claim the principal residence exemption. If however, you fail to report the sale, you will lose this exemption.  and a late filing penalty will be charged $100 per month with a maximum of up to $8000 CAD.

So what qualifies as a principal residence? A principal residence can be a house, condo, apartment, cottage, mobile home, or even a houseboat, and they don’t have to be located in Canada.

The report for sale can be made on Form T2091(IND) and schedule 3.

Many taxpayers do not report the principal residence sales assuming that it is exempt from taxes but the sale must still be reported. It is true that you don’t have to pay tax for it but if you fail to report it, a hefty penalty is charged.

Read more about the Principal residence and change of use.

Not Checking Changes Made on Notice of Assessment

Once your tax return is filed, the CRA will always send a Notice of Assessment (NOA) after they have finished processing your return.

The NOA contains the summary of the total income to taxable income you earned that particular year, the tax credits and deductions you claimed, and the information on any additional tax to be paid or the amount to be refunded. Further steps can then be taken accordingly.

The NOA also provides a detailed explanation if the numbers you provided do not match the ones they have obtained. You should know that the CRA is not always correct and can make mistakes sometimes, either human errors or system errors.

So it is important to make note of the changes made on the NOA and rectify them before the deadline. The date on which you receive your NOA will determine the deadline before which you may file an objection.

Ignoring the Tax Filling Date

Ignoring the tax filing date is the first step toward missing the deadline for filing the return. This will result in a lot of unnecessary delays and penalties that could have been easily avoided if you had kept a record of the tax filing date.

Firstly, you won’t receive your refund on time. It could also delay your benefits payment and if you owe taxes missing the deadline attracts interest charges and a 5% late penalty with an additional 1% for every month thereafter.

Shopping for Accountants Offering Max Refunds

During the tax year, many accountants, rather than seasonal tax preparers, make promises of maximum refunds on filing your tax returns. However, it is important to be able to make good judgement in choosing the right one.

Once you sign off your tax return, all the information contained in it taxpayer’s responsibility. If you claimed ineligible deductions or credits, you may get an instant refund, but later reviews result in repayments! Deferral of income is another area a lot of tax preparers exploit to reduce their income in order to get tax refunds. For example, delaying issuing dividends from the Corporations and making taxpayers pay higher taxes in the future years when the amounts are withdrawn. 

Do not look for an income tax return preparer offering maximum refunds, rather go for the one with maximum optimization and long-term income tax planning. 

A Final Note

It is common to make mistakes while filing your tax return and CRA allows you to make changes to your return for the past 10 years. Apply for changes after receiving your NOA along with all necessary documents and receipts.

If you filed your return online using EFile, you can simply log in to your account and go to the ‘Change my return’ option. You can also fill out the T-1 Adjustment Request Form and have it mailed to your local tax center. Apart from that, you can also send a letter signed by you to the tax center, stating the changes you made along with all the supporting documents and receipts.

Maroof HS CPA Professional Corporation is a Toronto-based professional accounting firm. It provides comprehensive income tax services for corporations and individuals. If you are looking for help with individual income tax return preparation or income tax planning, get in touch with us today.