People will do almost anything to save on taxes, like claiming the family dog as a security system for their home business, or claiming their stamp-licking toddler as an employee.
In her 18 years of accounting, Christie Henderson, managing partner of Henderson Partners LLP, has seen these and other dubious deductions in her clients' tax returns. While there is some room for interpretation within the tax rules, being deceitful risks attracting the attention of the Canada Revenue Agency, Ms. Henderson warns.
"I heard a great story about someone who showed up at a CRA auditor's house and offered to do their driveway sealing for less, for cash," she laughs.
To help you make the most of your tax deductions and stay on the right side of the law, here are the top 10 year-round tax tips from the book Ms. Henderson co-wrote, 78 Tax Tips For Canadians For Dummies:
1. Open a TFSA
The Tax Free Savings Account allows Canadians to save and invest $5,000 a year and earn tax-free income and gains for life. Withdrawals aren't taxed, don't negatively affect your eligibility for government benefits and can be recontributed the following calendar year. The TFSA also has carry-forward room, so if you haven't contributed to a TFSA at all, you can invest $15,000 in 2011.
2. Maximize your RRSP contributions
One of the last great tax shelters, a Registered Retirement Savings Plan is an investment vehicle that allows you to save for your retirement on a tax-friendly basis. Funds you contribute are not taxed until you withdraw them. RRSPs also offer carry-forward room. Check your previous year's Notice of Assessment to see the carry-forward room you may have.
3. Set up a spousal RRSP
The primary benefit of a spousal RRSP is that funds withdrawn can generally be taxed in the hands of a lower-income spouse.
4. Open RESPs for your kids
Contributing to a Registered Educational Savings Plan lets you take advantage of the Canada Education Savings Grant, which is free money from the government. You may also be able to catch up on missed grants from prior years. Low-income families may also be eligible for the Canada Learning Bond.
5. Explore pension splitting
If you've received pension income in the year, be sure to investigate whether splitting up to half of that income with your spouse or partner makes sense when you file your tax return.
6. Earn tax-efficient investment income
If you've maxed out your TFSA and RRSP contributions, consider investing in Canadian stocks that pay dividends, which are eligible for the dividend tax credit. Also remember that capital gains on stocks are only half taxable.
7. Double check your return
Before you send in your tax return, check first for mathematical accuracy. Make your life easy and use tax software or an online service to ensure your numbers add up properly. Avoiding simple mistakes is the first step in keeping the CRA from reviewing your return more closely.
8. Report all income
Make sure you've reported all the money you've received, including interest and dividends from all your accounts. If you forgot something, you can be sure CRA will eventually find it. They get a copy of all information slips you receive and cross check them by computer to make sure everything is reported.
9. File a tax return
Some people argue that the only way to ensure your tax return doesn't get audited is to not file a tax return. Non-filers risk not only getting caught and getting hit with interest and penalty fees, but also going to jail.
10. Don't cheat
The taxman has ways of tracking down cheaters. The CRA has identified industries with a higher incidence of cheaters, such as construction, subcontractors, unregistered vehicle sales, auto repair, direct sales, childcare, cleaning and restaurants. If you work in one of these industries, you are more likely to hear from the CRA. Also, be aware of your online musings as the CRA may be watching those online forums to look for cheaters.