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1. Not filing on time.

If you are late in filing your tax return, the first time penalty is 5% of the balance owing, plus 1% of your balance for each full month that your return is late to a maximum of 12 months.

If you were charged a late filing penalty for any of the three previous years your late filing penalty would be 10% of the balance owing plus 2% of the balance for each full month that your return is late to a maximum of 20 months.

If you file on time and don’t have the money to pay CRA they charge interest, currently 5%.  You can make arrangements to pay monthly.  In the long run you are going to pay your taxes, so why pay exorbitant penalties and interest on late filing.

2. Poor record keeping

If you fail to report income from a T4 or bank interest (T5) CRA will catch the omission during their matching process.  CRA receives a copy of all slips and when the annual rush at the end of April is over, the tax department computers check what you have reported against the slips they have on file.  If you fail to report an amount on your current tax return (missing slip) and you also fail to report any amount on the previous three years you may have to pay a federal and provincial repeat failure to report income penalty.  The penalties are currently 10% each on the federal and provincial tax owing.

3. Ignoring correspondence from CRA

The tax department is not going to go away and if you annoy them they have sweeping powers to enforce tax compliance.  If you are not certain what CRA wants, contact your tax preparer before you respond.  If you have prepared your own tax return make certain you have a full understanding of what the issues might be.  If you are not sure pay somebody to give you advice.  In the long run this is less expensive than attempting to deal with CRA on your own.  They know the rules and you may not.

4. Doing your own taxes

If you have a more complex return you may want to consider paying someone to prepare your taxes.  The rules pertaining to such things as capital gains, loss carry forward and carry back, alternate minimum tax, are complex and if not handled properly can result in reassessment and extra taxes to be paid.

5. Business expenses

Many small businesses keep terrible records.  This is not a good idea for two reasons.
One, how do you know how your business is doing if you don’t keep track of sales and expenses?  Secondly, CRA will audit you at some point and the result is not pretty. First of all note that any credit amount showing up on your bank statement is considered your income unless you prove otherwise.  Secondly the tax law says you have to keep a reasonable set of books.  You must have records to support the amount of expenses you are claiming otherwise the expense will be rejected and that amount added into your income.  Since you are in business think like a business and act like a business.  All receipts pertaining to the earning of income should be kept for six years.  Always document why the expenditure was made, who it was made to, and how it relates to your business.

6. Charitable Donations

Donating money to a legitimate charity is a good thing.  However, these so called tax shelters offering big tax breaks for donations will always be challenged by CRA.  To date none have stood up in court.  If anyone offers you the opportunity to donate $5000 to a charity, and promises to issue you a receipt for many thousands of dollars more than you donate be careful.  Make certain you obtain independent advice.  Promises to receive a tax refund greater than the original donation amount should cause you to take certain steps – long ones in the opposite direction.  These are scams to be avoided at all costs.

7. Making a claim as an independent contractor

If your employer and yourself decide that you are now going to be paid as an independent contractor and receive gross amounts without taxes, EI or CPP being withheld, so you will now be able to write off business expenses -- be careful.

You should contact your accountant or lawyer or alternatively ask CRA for their booklet Employee or Self-employed form (RC4110(E).  If you don’t qualify to be considered an independent contractor, the consequences can be expensive.  You and your employer do not decide that you are an independent contractor, rather the courts have decided on the nature of such relationships.  If after receiving proper information you are still uncertain, you can ask for a formal ruling from CRA.

8. Throwing away your Notice of Assessment (the statement you receive after filing your tax return).

The Notice of Assessment often contains information on carry forward claims that can be utilized in the current tax year.  Such things as non-capital loss carry forward and unused RRSP contribution can reduce your current year taxes.  The Notice of Assessment or Reassessment may also have adjustments to your tax return which are not correct or can be easily corrected by supplying the information requested by CRA.

9. Child care expenses

Most families are aware that child care expenses paid to a day care are normally deductible.  However, day care expenses paid to a relative or grand-parent who lives in your home and who may have little or no income and who babysits can be paid for looking after the children.  Note – that you may be required to withhold source deductions.

10. Caregiver amount

If at any time in the tax year you maintain a dwelling where you and one or more of your dependents resided you may be able to claim a caregiver amount if their income is low.  There are two categories:  parents over the age of 65 years or relatives who are over 18 years of age and are dependent on you due to mental or physical impairment.

NOTE:  CRA’s most common requests for back up documentation includes the following:

  • Medical expenses
  • Moving expenses
  • Charitable donation receipts
  • Tuition transfers (T2202)
  • Rental payments
  • Claims for eligible dependents (after separation or divorce)