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The top 10 items the taxman will query on your return

Today, I want to share with you the top 10 items on tax returns that were most often questioned by the Canada Revenue Agency (CRA) last year. These come from an informal poll of tax specialists at my alma mater, accounting firm Deloitte, and appears in the firm's newsletter "Tax Breaks."

Capital gains and losses. The CRA often asks for details supporting the calculation of your capital gains and losses. Pay particular attention to your adjusted cost base (ACB). Is it correct? For example, income trusts often distribute returns of capital, which should reduce your ACB.

Allowable business investment losses. According to Deloitte, this one is automatic. Losses on the shares of, or loans to, small-business corporations will trigger a form letter from the CRA asking for more details. Make sure you have supporting information handy.

Carrying charges. Expenses incurred to earn investment income such as interest and investment counsel fees may be deductible. But keep supporting documentation available. Be aware that the CRA is stepping up its look at interest expenses to ensure you truly have an expectation of profit from your investments.

Foreign tax credits. Many Canadians claim foreign tax credits for taxes paid on foreign investment or employment income. The CRA has become much more active in the past year in questioning entitlement to claim these credits.

Province of residence. This was never an issue in the past, but the provinces have stepped up their questioning in this area. Increased interprovincial tax planning at the personal, trust, or corporate levels has led some provinces to try to protect their revenue base.

Charitable donations. The donation tax credit has become the new tax shelter for many promoters. It's no surprise, then, that the CRA looks closely at donations other than cash, and cash donations over $25,000. The CRA wants to weed out abusive donation schemes.

Employment expenses. Most employees are not eligible to claim employment expenses. So, the CRA is taking a close look when employment expenses are claimed. Be sure you have supporting documentation such as a signed T2200 form and receipts.

Child care expenses. Knowingly or not, parents often claim expenses that don't qualify. The principal purpose of the expenses must be child care. So, athletic coaching, music lessons, and tutoring don't normally qualify. The key is to ensure you understand what qualifies, and only claim those amounts.

Mining, oil and gas expenses. It's not uncommon for these items to be reported incorrectly for tax purposes. And so the CRA will often ask for information related to flow-through shares and similar investments.

Tuition and education expenses. The CRA often requests more information as to tuition and education amounts. Be sure your child has the T2202A form to support the amounts claimed. Also, make sure the amounts are claimed on your child's return first if he or she has sufficient income.

Tim Cestnick, FCA, CPA, CFP, TEP, is a tax specialist and author of Winning the Tax Game 2005 and The Tax Freedom Zone.

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