After hiring an accountant in 1998, Jim Mahon was surprised to learn how he'd failed to take full advantage for several years of all the tax deductions he was entitled to as a self-employed entrepreneur.
The 61-year old founder and president of International Trade Show Services Inc., a Burlington, Ont., trade- and consumer-show producer, had missed out on several allowable car expense claims and home writeoffs.
"Those kind of mistakes were costly to me," says Mr. Mahon. The subsequent savings have amounted to a "sizable difference. When you're running your own little business, all of these savings are significant. Year after year, they add up."
Mr. Mahon isn't the only one making such errors. Here are 10 of the top mistakes tax filers make -- and you should avoid:
1. Fail to file on time or at all. For those who owe tax, missing the April 30 filing deadline can draw severe penalties and interest, including an automatic 5-per-cent charge, plus 1 per cent a month over the next 12 months.
Some don't file at all. But even someone with little income who doesn't owe tax or expect a refund should file to register official earned income for RRSP purposes.
When only one spouse is working, the other should file a nil return. Not doing so could negate their family unit being able to receive benefits such as the sales tax, GST and child tax credits, notes John McCormack, a certified general accountant in Oakville, Ont.
2. Parents fail to pick up tuition transfer. A number of parents, grandparents and spouses fail to take advantage of the opportunity to receive up to $5,000 in available education and tuition fee transfer amounts from students who have little or no income and therefore can't use the full credit. This failure can significantly increase the tax the family unit pays.
The transferred credits must be claimed in the year they are incurred. If the amount is not transferred, any carryforward is available only to the student, for use at any time.
3. Inefficient filing of donation credits between spouses. Spouses should combine donation credits to get the most bang for their charity buck. That is significant because the federal non-refundable tax credit rises from 16 per cent to the top tax threshold of 29 per cent when donations exceed $200.
4. Inefficient filing of medical expense credits. Many taxpayers claim only personal medical expenses on their tax return, rather than combining such expenses as part of a family unit to take advantage of a threshold which is the lesser of $1,728 or 3 per cent of that individual's net income for the year. "If a husband and wife were to claim medical expenses separately, there's a very good chance they wouldn't be able to claim any [credit] at all because it's based on that 3-per-cent threshold," Mr. McCormack says.
Normally, the spouse with the lower income should claim medical expenses.
5. Failure to take full advantage of self-employed deductions. As Mr. Mahon discovered, many self-employed individuals fail to take full advantage of the savings available to them.
But, warns Robert Snowdon, an Ottawa-based chartered accountant, claiming too high a proportion of expenses, particularly in areas related to automobiles or entertainment, might also serve as a red flag to the Canada Customs and Revenue Agency (CCRA), prompting an audit. As a result, all entrepreneurs should maintain detailed logs to back up their expenses, he suggests.
6. Failure to pick up provincial/territorial credits. A number of taxpayers also fail to take advantage of provincial and territorial tax credits, such as property and sales tax credits. Even students who are earning minimal income are eligible for these credits but tend to forget about them, says Gena Katz, principal of Ernst & Young in Toronto.
As well, taxpayers in a married or common-law relationship sometimes incorrectly claim these credits individually without properly taking into account their spouse's income.
7. Unused transfers to spouse. A variety of federal non-refundable tax credits can be transferred between spouses, particularly useful to individuals at a lower income level. Yet taxpayers tend to miss out on claiming certain credits, like the age credit and first $1,000 of pension income, say tax pros.
Another tax credit that taxpayers sometimes miss out on is the equivalent-to-spouse amount.
Although many are aware of the spousal credit, they don't know that a similar credit exists for single, separated or divorced people who have a dependent relative living with them.
8. Failure to pick up sundry expenses. Many taxpayers also tend to miss writing off certain expenses such as safety deposit box fees, brokerage fees on stock transactions, carrying charges and interest on borrowed money to purchase investments such as equities or mutual funds.
9. Failure to offset capital gains with capital losses. Remember that some of the capital gains made toward the tail end of the boom market in the late 1990s and in 2000 can be offset by subsequent capital losses resulting from the market swoon. "Those capital losses can be applied against any capital gains. Assuming the losses exceed the gains, the loss could actually carry back up to three years or forward indefinitely," Mr. McCormack says.
10. Failure to recognize allowable business investment losses (ABIL). Under special circumstances, taxpayers who've invested in a small business corporation that has become insolvent or otherwise gone bad may be eligible for tax relief in the form of an ABIL.
In the year the loss is realized, the taxpayer could be eligible to apply one-half that amount against all other income, not just capital gains.
Under those circumstances, some taxpayers incorrectly assume their loss is a more restricted capital loss.