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Five changes that might help save your dollars at tax time

It was eight years ago that U.S.-style performance art arrived in Russia.

You see, Alexander Brener of the United States was arrested in 1995 in Moscow for dressing in boxing trunks and gloves in Red Square and demanding that President Boris Yeltsin come fight him. Previously, in the name of art, Mr. Brener had attempted to copulate with his wife at a monument, defecated in front of a Van Gogh painting at a museum, and driven staples into his buttocks at an art house. Ouch. This all seems very strange to me. I guess I'm totally out of touch with trends in art.

Trends in tax, however, are something I do understand. And over the past year there have been some changes that could save you dollars when you file your tax return this year. Consider these five.

1. Equivalent-to-spouse credit.

You've gone through a marriage breakdown. Now, you're wondering whether you're able to claim the equivalent-to-spouse tax credit, which could save you about $1,700 (varies by province), or whether your ex is supposed to claim it.

The good news? You both may be able to claim the full credit. You see, Canada Customs and Revenue Agency has recently said that where both parents have custody of the children, at different times throughout the year, the children may be wholly dependent on each parent. In order for each parent to claim the credit, your separation or divorce agreement will have to be worded such that each parent is required to wholly support one of the children. See Canada Revenue's document 2001-0101105 dated Jan. 7, 2002. (You can get a copy at http://www.timcestnick.com).

2. Home office expenses.

If you run a business from home, you'll be able to claim home office expenses provided your home is your principal place of business, or where you use a specific area of your home exclusively for earning income from your business and you meet clients or customers there on a regular basis. Hmm. Meeting clients in your home can be a tough test to meet.

Here's the good news: In the case of Thomas Vanka v. the Queen, the taxpayer, a doctor, was permitted to claim home office expenses even though he did not physically meet patients at his home office regularly. Rather, he met with them by phone and was able to bill for that time. You may be entitled to similar treatment if your facts are similar to Dr. Vanka's. Speak to a tax pro for more.

3. Interest deductions.

On Oct. 1, 2002, Canada Revenue released a report on the issue of interest deductibility in the wake of two high-profile court decisions in 2001 on the same issue. If you borrowed money to invest and are hoping to claim a deduction for your interest costs when you file, you'll be pleased that Canada Revenue's report confirms that you can deduct your interest costs where you invested the borrowed money with a reasonable expectation of earning "income from property" (interest, dividends, rents, royalties).

This does not mean you have to earn income from property every year. Further, earning capital gains may have been your primary objective -- and that's okay. By the way, the Supreme Court of Canada said the requirement to earn "income" means gross income, not net income after deducting the interest costs.

4. Moving expenses.

Canada Revenue has normally held the position that you must start a new job or business to be entitled to claim moving expenses. Not any more.

In the court decision Gary Adamson v. the Queen, Mr. Adamson had incurred moving expenses as an employee who was required to provide his own office in his home.

He decided to move to a new home to provide greater needed office space. The court allowed his deduction even though he hadn't started work for a new employer.

You'll still have to meet the other usual tests to deduct moving costs.

5. Business or rental losses.

If you're concerned about reporting business or rental losses for yet another year, you may not have reason for concern.

It used to be that Canada Revenue would often disallow business or rental losses on the basis that there was no reasonable expectation of profit (REOP) from the activity.

Thanks to two Supreme Court of Canada decisions in 2002 (the Stewart and Walls decisions), Canada Revenue is no longer permitted to use the REOP test where there was no personal element to the activity -- that is, where the activity is purely commercial in nature.

On the other hand, if there is a personal element (for example, you're claiming rental losses on a vacation property that you use personally), the REOP test may still apply to disallow your losses.

Tim Cestnick, CA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, National Tax Services, at AIC Ltd.

tcestnick@aic.com



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