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Common errors to avoid in preparing a tax return

by Wayne Cheveldayoff, 2006-03-16

Every tax accountant has seen the numerous errors that people can make in preparing a tax return.

Some of the errors are simple calculation mistakes. But what bothers tax specialist Lloyd Henry the most is the failure to take advantage of available deductions and credits. It means people end up paying more income tax than they should.

Mr. Henry, a client service manager in Southern Ontario for H&R Block Canada, which prepares two million tax returns annually, cites the following common errors made by Canadians:

1. Failure to claim moving expenses when you move at least 40 kilometres to take a new job or to go to school. In addition to transportation costs, you can deduct the real estate commission on the home you sell and the legal fees for both home purchase and sale.
2. Failure to use the disability tax credit when you can. The disability qualifications have changed for the 2005 tax year, so it is important to check. The Canada Revenue Agency (CRA) usually requires a doctor to fill out a special form and then, if approved, will inform you how many years you can claim it before it is reviewed again.
3. Not being prepared for a request for documentation for post-secondary tuition expense transfers to a parent or spouse. CRA often will ask for proper documentation. If you donít respond, you will get a bill in the mail with a reassessment, although if you come up with the documentation, CRA will reverse the assessment and penalties.
4. Lots of people, particularly seniors, miss deducting health insurance premiums as medical expenses, even if the insurance is bought for travel to vacation spots outside of Canada.
5. Young people often fail to file a return because their income is under the personal exemption (just over $8,000). However, one needs to file a return to get back any income tax withheld at source. Any amount of income reported is also used to calculate your cumulative RRSP deduction room, which could end up being quite valuable in later years. Young people should file a return even if they have no income. Students turning 19 in the next year should file to trigger the GST credit for the first payment period after their birthday. Students 16 and over in Ontario may be entitled to the $100 Ontario Sales Tax Credit if they are no longer living at home. Students applying for federal and provincial loans and bursaries will need to have filed a return to confirm their income or prove they have no income.
6. Failure to keep proper documentation. In the summer and fall when tax-filing activity abates, CRA goes through the returns again and picks some for special audits. The CRAís most common requests for documentation include moving and medical expenses, tuition transfers, and proof that a child resides with a single parent claiming an eligible dependent amount for the first time. Taxpayers should not throw important documents away. You need to hang on to them for a least six years, although CRA generally doesnít come back after three years.

Among other frequent misses by taxpayers is that caregivers sometimes donít realize they can claim a tax deduction. This applies to parents taking care of infirm children, or children taking care of infirm or elderly parents.

Also, student loan interest is deductible on education loans from the government, but not on loans from banks or other private sector lenders.

CRA is encouraging most to e-file and only a few with special circumstances arenít allowed to. E-filing makes sense for the government because it saves on costs related to inputting numbers, processing and warehouses for storage of returns. The fact that it reduces inputting errors also benefits taxpayers.

However, e-filing may also mean the hassle of CRAís subsequent requests for documents, which wonít happen if a full, documented return is sent in.

Another notable element of the e-filing system is the role played by third-party tax preparers. Even though they are acting for and are paid by taxpayers, they are, in effect, a front-line screen for CRA because they are supposed to see legal documentation for a deduction before it is allowed on a return (or they may get penalized). Also, CRA often goes to them first to get documentation since they usually keep it for the taxpayer.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2006 Wayne Cheveldayoff