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Odette Morin

Odette Morin

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6 sure ways to get audited by Canada Revenue

It is that time of year when we all have to do the dreaded tax reporting to Canada Revenue.  It is painful for most of us to gather the receipts, fetch the ones missing, enter everything in the tax software, wonder if you got it right and freek out if you owe money.  A refund is for all the ultimate goal.  We do over 400 returns a year at You First and for each one of them, we sharpen our pencil, scratch our head and consult the big tax book to try to get the best refund for all. 

Even if you did everything right or hired an expert to do your return, you can still get in trouble with the tax man. Here are 6 ways you can mess up and attract an audit.
6 sure ways to get audited by Canada Revenu Agency (CRA)
  1. Not entering all T-slips: It is your responsibility to report all of your income.  If you miss a T4 for employment or an investments T3 or T5, CRA will sooner or later pick on it.  The new penalties are harsh. Each year the CRA checks the T-slip information in its database against Canadian taxpayer’s income tax returns to ensure the T-slip income reported matches. Where the income filed by a taxpayer does not match the CRA’s database records, an income tax reassessment is mailed to the taxpayer asking for the income tax due. If the taxpayer is a first time offender, they are just assessed the actual income tax owing and possibly some interest. If this is the second occurrence in the last four years, a 20% penalty of the unreported income is assessed. Fetch ALL of your tax slips.  You can’t afford to miss one!
  2. Ignoring a CRA request for additional information: CRA routinely asks to see your moving expenses, medical expenses and other deductions. Don’t be alarmed.  Since most returns are now EFile, they just ramdomly want to check your legit expenses. But if you ignore the request, if a big no no. Do not leave any CRA letter unopened. Take the time to write a cover letter and attaching your justification receipts.  If we did you tax return for that year, just contact us and we will respond to CRA for you for free!
  3. Reporting a loss for too many years on your business income or rental income.  To be entitled to deduct or write off self-employment expenses or rental expenses, you have to have a reasonable expectation for profit.  If you run a loss for too many years, the red flag will go on.  Only deduct what you are truly entitled and tone down expenses to show a profit if you must. 
  4. Showing little net income from your self-employment, yet posting lots of pictures on facebook of your new SUV, laving vacations and fine dinning meals?  Yes Big Brother CRA is looking at you!  If your net income does not match your lifestyle, be prepared to justify. 
  5. Reporting items for which you received a reimbursement.  If your employer paid for your moving expenses, you can only claim what you did not get reimbursement for.  The same goes for medical expenses reimbursed through your medical plan.
  6. High business percentage of automobile or home office expenses.  Yes we know you work in your living room sometimes or the kitchen but no, you can not claim your whole house for home office expenses.  Also, even if you say you work all the time, if you only own one car, claiming 100% of car expense just does not make sense and will be sure to attract attention.  
A lot of it, is common sense.  Be reasonable with your deductions and responsible with your tax reporting.  That is the sensible way to deal with CRA!  Wishing you all a fabulous refund this tax year!!

Tax tip: RRSPs do not have to be deducted all at once

Itax tip 1f you made a large RRSP contribution, you may be best to defer some of the deduction to a future year. You would want to do this if your tax bracket will be higher in a future year. Look for the carry forward line in your tax software and play with the numbers to see the impact on the refund or tax owing, or ask us when you drop off your tax documents. We can figure this out for you!

When to avoid RRSP

For most people, RRSPs are pretty hard to beat however they are a few instances that quickly come to mind when RRSPs are not the way to go.

 

  1. When you need the money in the short term, you should avoid contributing to an RRSP.  Not only you will owe the tax refund back, but you will also lose your deduction limit. Some tax advisers would recommend a short-term RRSP when your tax rate is high and will drop in the following year to benefit from the tax difference but again, I do not advocate this because eroding your contribution room is quite costly. The tax free compounding is very valuable over the long-term.
  2. When your income is going to be higher at retirement.  This is very rare but if you anticipate your income to be higher at retirement than it is today, you should avoid making an RRSP contribution. Avoid a situation where you obviously have to pay more tax later than the tax saving today.
  3. When you are close to the GIS qualification. If your savings are modest and you anticipate having very low income at retirement, it would be best to avoid RRSPs which could jeopardize qualifying for the Guaranteed Income Supplement.
  4. When you expect a very large RRSP at 71. If you calculate that your RRSP will be so big at age 71 that the minimum annual payment might clawback your Old Age Security (OAS) benefit it would be best to stop contributing to your RRSP.

If you meet one of these situations, you may be best to contribute to a TFSA or make a non-registered investment.

Careful calculations and projections must be made to plan properly.  Make sure to discuss these few points with us at your next annual review meeting.

 

RRSP or not

Three main reasons why Markets are volatile

  1. The end of QE in the U.S is in sight. So it’s natural to expect some volatility as this unfolds gradually.
  2. The price of oil dropped unexpectedly in a big way. When unexpected events occur, the markets react.  The price of oil is expected to come back to the more normal level of $80 a barrel within a few quarters.
  3. Global Growth is slowing.  We have seen tremendous growth in the past 3 years following the financial crisis. The recovering economies are still expected to grow but at a more moderate level.  Any type of slow down affects the markets.

Always remember that equity investment returns are closely tied to corporate earnings growth and the price you pay for those earnings. Historically, over the long term corporate earnings have been fairly stable and have grown along with productivity gains and inflation. Stock valuations though are more volatile than earnings since they are influenced by investor sentiment, which swings between optimism and pessimism. Learn to live with market volatility by focusing on your investment earnings yield instead of your investment market value.