10 Mistakes The Do-it-yourself Taxpayers Make When Filing Their Tax Returns

As we approach the June 1 personal tax filing deadline in Canada, ensure you don’t make these mistakes when you file your taxes

As we approach the extended June 1 filing deadline for personal tax returns in Canada, most taxpayers will be filing their tax returns using a do-it-yourself tax software.

Often, these taxpayers assume that using a do-it-yourself tax filing software means they no longer need the support of their accountants.

While most of these personal tax softwares are mathematically correct, provide “intuitive” guidance based on your responses to tax questions, and allows for ease of filing with the Canada Revenue Agency (CRA), they don’t provide advice when dealing with personal financial matters that may impact the current year’s tax filing.

As a result, you may miss important tax planning tips that may impact your current and future tax filings. Here are 10 of the common mistakes these taxpayers make so you can avoid them as you file your taxes in the coming weeks:

1. Taxpayers tend to put the most favorable interpretation on tax rules and regulations

For example, being self-employed does not usually mean you are entitled to expense everything that comes to mind. Certain expenses such as clothes you wear to work, meals and entertainment, home office expenses may not qualify as eligible expenses.

Although these expenses could be taken as a deduction when you file your tax return, there are specific rules you must be aware of to determine eligibility.

2. Taxpayers often think they can claim what their friends can claim

You only look at your own situation. Each taxpayer’s circumstances are different. One of the most common tax filing mistakes is the belief that car expenses can be written off merely because you drive your car to work.

Vehicle expenses are only deductible where the vehicle is needed to perform the job, the employer demonstrates that need, and provides a signed and dated Declaration of Conditions of Employment to the CRA, if requested.

3. Taxpayers overlook the benefits of carryforwards

Common examples of lost tax reduction opportunities from carryforwards are tuition fees, capital and non-capital losses, medical expenses and donations. All these carryforwards, if ignored, will result in a higher future tax expense for the taxpayer.

4. Taxpayers do not keep their tax files long enough

Taxpayers may be aware that as a general rule, CRA requires you maintain all tax records and documents that support your filed tax returns for a period of six years from the end of the last tax year to which they relate.

Additionally, if you file an income tax return late, you must keep your records for six years from the date you file the return.

Most taxpayers will probably be able to find the original source documents in a box in the basement, but finding electronic copies of tax returns can be problematic as new computers are purchased, PDF files are lost, tax programs are erased or new tax software cannot read old programs.

5. Taxpayers may think CRA will provide them with a positive reassessment

If you fail to file information from a T4, T5, or other documents that are matched with the records of your employer or financial institution, the CRA will notify you, reassess you and undoubtedly charge you interest and, perhaps, even a penalty, for your oversight.

On the other hand, if CRA discovers through the filing process that you have missed inputting property taxes, tuition fees, disability or any other deductions to which you are entitled, the CRA is under no obligation to notify you and send you a refund.

6. Taxpayers may miss opportunities to file corrections

If errors or omissions occur in the filing, taxpayers may not know how to take advantage of the opportunity to correct the error by filing a T1-Adjustment. Thus, the possibility of reducing income tax liability may be lost forever.

7. Taxpayers who are owner-managers of a corporation may fail to record draws and loans from their company as income

Failure to properly record this income may result in additional taxes, interest and penalties.

8. Taxpayers may miss available deductions

Interest expense on business or investment loans, income splitting, administration fees paid for investment counsel, combined with myriad deductions that may be available to a taxpayer may be missed.

These are just a few examples of deductions that taxpayers miss when they file their tax returns. As a result, they pay more than they should in taxes.

9. Taxpayers may miss available credits

Tax credits directly reduce the amount of taxes due, dollar-for-dollar. Refundable tax credits like working income tax credit and non-refundable tax credits like charitable donations and spouse/common law partner credits could be missed if care is not taken when filing your tax returns.

10. Taxpayers get upset when dealing with the CRA

If you are nervous and feel generally uncomfortable dealing with your tax matters, you may misinterpret the needs of a CRA officer and inadvertently provide inadequate or incorrect information that may unnecessarily result in an expanded audit process.

Conclusion

Although most taxpayers are able to file their personal tax returns using many of the softwares available, it is important to seek advice, particularly if you have a complex situation.

As a licensed Chartered Professional Accountant, I am always on your side. If you have any questions, you can ask me by joining my private forum, “Ask Ken Anything”. This is a paid membership forum that I’m opening up for FREE until June 30, 2020. As the name suggests, you can ask me anything from your personal taxes, business taxes, starting a business, building and growing wealth, personal financial management, personal development, etc.