Canadians - Items Questioned by CRA

Past experience has provided insight as to items that the CRA tend to examine in their review of personal tax returns. Listed below are items which tend to be reviewed by the government, and are listed in no particular order.

1. Verification of capital gains and losses. Details in relation to capital gains and losses incurred are often sought by the CRA. It is very important to track cost base information accurately, particularly with respect to income trusts, which often provide a return of capital that erodes the cost base over time, and investments denominated in foreign currencies, where the foreign exchange gain or loss must be calculated in addition to the economic gain or loss. There are often significant discrepancies between the carrying cost reflected on the statements provided by a financial institution in respect of an investment account and the cost of the investments for tax purposes.

2. Allowable business investment losses (ABIL). This one is automatic. Losses claimed on investments in small business corporations are almost inevitably followed by a standard form letter from the CRA requesting additional information. The ABIL rules are very complicated and it is recommended that all the supporting material be made available at the time the loss is claimed.

3. Carrying charges. Expenses incurred to earn investment income, such as interest and management fees, are generally deductible, but it is critical to retain supporting documentation and not to claim any amounts that relate to personal expenses. Increasingly, the CRA is requesting more detailed information and actively investigating the use of borrowed funds.

4. Foreign tax credits. This item is new to the list this year. Many Canadians earn foreign-source income, either from investing or through employment. Foreign tax credits can generally be claimed against Canadian tax owing to reflect the cost of taxes paid to other countries. The CRA has become much more active in questioning entitlement to claim foreign tax credits and reviewing the amounts claimed.

5. Province of residence. The subject of interprovincial tax planning – whether at the individual, trust or corporate level – is growing in importance and the provinces are alert to the need to protect their revenue base.

6. Large charitable donations or donations of property. Cash donations in excess of $25,000 are consistently reviewed, as are donations of property other than cash. There have been significant legislative changes in this area, and the tax authorities are focused on weeding out abusive structures that make inappropriate use of the tax relief provided to charitable donations.

7. Employment expenses. Eligibility to claim employment expenses is limited, and subject to stringent conditions contained in the Income Tax Act. Because most employees do not qualify to claim this deduction, those individuals that do make a claim should anticipate questions.

8. Child care expenses. Verification of costs incurred for child care is another common request by the tax authorities. It has been noticed that many organizations provide receipts to parents for services that may not qualify for tax relief because their principal purpose is not the provision of child care. Examples of these services include athletic coaching, music lessons and tutoring. Confusion ensues because the receipts are frequently printed with the phrase “for tax purposes” and parents quite reasonably assume the amounts paid qualify for the child care deduction.

9. Mining and oil & gas investments. Request for flow-through amounts and investment tax credit confirmation is fairly standard. It is not uncommon for these items to be reported incorrectly for tax purposes, particularly when an individual is not familiar with the specialized tax rules governing resource investments.

10. Tuition/Education expenses. Support for tuition and education expenses is consistently requested, so make sure your student has the documentation!

 

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