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Take a lesson from past tax blunders

Looking for a few extra deductions to claim this year when filing your tax return? How about another tax credit or two?

While there's not much you can do at this late stage to create new deductions or credits to save tax for 2001, one thing you can do could save you a bundle.

I'm talking about avoiding those blunders that so many Canadians made last year in filing their returns. Avoid these 10 common mistakes and you'll keep more money in your pocket.

1. Don't confuse tax preparation with tax planning.

The person preparing your tax return this year may do a fine job at filling in the forms, but this is a far cry from properly planning to reduce your taxes. It may make a lot of sense to visit a chartered accountant or other tax specialist for an opinion about whether there are other strategies that could save you tax over the long run. This is especially true if you're self-employed or have complex tax issues.

2. File on time.

It's amazing how many people fail to file their returns on time. If you're getting a refund, failing to file by the April 30 deadline will result in a delay in getting that cash back. If you owe money, failing to file will result in a penalty of 5 per cent of any tax balance owing, plus another 1 per cent for each complete month that you're late, to a maximum of 12 months. File late for a second year and your penalties could double. File your return on time if you owe money, even if you don't have the cash to pay the taxes. While you'll pay interest on any outstanding taxes owing, at least you'll avoid the penalties.

3. Don't assume all deductions should be claimed this year.

Some deductions are discretionary, meaning you can choose to claim them this year, or defer them to a future year, when your marginal tax rate could be higher and you'll save more money in claiming them then. An RRSP deduction is the most common example, with capital cost allowance a close second.

4. Remember provincial tax credits.

The year 2000 was the first in which many provinces adopted the tax-on-income (TONI) system; for 2001, all provinces and territories use it. It used to be that provincial taxes were simply calculated as a percentage of federal tax. Now, your province calculates your taxes based on your taxable income. With TONI, your province or territory will also offer its own tax credits for things such as donations, medical expenses and more.

Last year, some people forgot to claim these credits because they've never before had to claim them separately on the provincial tax forms. You'd hate to miss out on these tax savings this year.

5. Remember to claim child-care expenses properly.

Be sure to have proper receipts for any amounts you claim or they could be denied. Be careful about claiming costs for recreational or education activities (such as skating or music lessons) because the tax collector generally won't allow these. And be sure to report all children aged 16 or under on your tax return, even if you didn't incur child-care costs for all of them. The tax collector doesn't trace specific expenses to specific children; reporting all the kids will boost the amount you're eligible to claim.

6. Don't split medical expenses between spouses.

Make sure all medical expenses are claimed on the tax return of the lower-income spouse. Since medical expenses can only be claimed when they exceed a certain percentage of income, using the lower income will mean you can claim more expenses.

7. Don't split donation credits spouses.

Since you're entitled to greater tax relief on donations over $200, you'll want to maximize the total donations over that amount. You can do this by reporting all the donations on one tax return. It generally makes sense to claim them on the higher-income spouse's return.

8. Don't report self-employment losses forever.

Nothing shouts "come audit me" louder than reporting self-employment losses for more than about three years in a row. The Canada Customs and Revenue Agency expects you to have a reasonable expectation of profit to claim business expenses. If you have losses yet again this year, take a close look at why. In many cases, it may be interest costs you're claiming. If so, consider paying down that mortgage or other debt more quickly to reduce the loss problem. Be sure to have forecasts prepared to show in which year you expect to be profitable. And enlist the help of a tax pro if you do run into a problem with the CCRA on this issue. You'll be more likely to win.

9. Transfer credits to your spouse.

Certain tax credits can be transferred to your spouse if you can't use them, such as the age credit, disability tax credit, pension credit, and tuition or education tax credits. As well, it's possible to transfer the dividend tax credit to the higher-income spouse if the dividend income itself is transferred, too. This can make sense where the lower-income spouse would otherwise be unable to use that credit and can only be done where doing so will increase the spousal credit claimed by the higher-income spouse.

10. Don't ignore losses from investing in a business.

If you own shares in or have lent money to a small business corporation and it's gone sour, there may be tax relief available by claiming an allowable business investment loss (ABIL). An ABIL is calculated as 50 per cent of the money lost by you, and can generally be deducted against any type of income -- not just capital gains, although some restrictions may apply where the capital-gains exemption has been claimed in the past. Speak to a tax pro if you think you might be entitled to a deduction for an ABIL.

Tim Cestnick, managing director of Tax Smart Services at AIC Group of Funds, is author of Winning the Tax Game 2001.

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