I'd be wealthy if I could just find a way to deduct the cost of the golf balls I use each year. Once again, I managed to somehow lose a box of golf balls on a course last weekend in places that mankind has not set foot before. However, the taxman simply won't allow my poor golf game to save me money.
In a previous column I wrote about a number of expenses that either cannot be deducted, or are limited in deductibility, including fines and penalties, personal or living expenses, and club dues. Today, I want to talk about some other costs that can be problematic from a tax point of view.
Subsection 8(2) of our tax law says that, generally, no deductions can be claimed against income earned by employees or officers of a company, unless Section 8 of the Income Tax Act (ITA) specifically allows it (the list of allowable expenses is a topic for another day).
This is a different approach than that offered to business owners, where any costs are deductible provided they are reasonable and were incurred to earn income from the business or property (the exceptions are where the ITA specifically disallows certain deductions). This is why self-employment, even part-time, can be a great way to create deductions for things you're paying for anyway – such as vehicle costs, and home costs like utilities, repairs, or even mortgage interest and property taxes.
If you incurred costs related to earning income from property that is exempt from income tax then don't expect to deduct those costs – they won't generally be deductible.
Registered plan fees
It's probably no surprise to you that fees related to registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and tax-free savings accounts (TFSAs) are not deductible. If your financial adviser can justify allocating more of your investment fees to your non-registered accounts then you'll be better off from a tax perspective.
As a general rule, interest is considered to be a capital expenditure and is therefore not deductible unless it falls under the provisions of paragraph 20(1)(c) of the ITA. Most notably, interest is deductible if it was incurred on borrowings used for the purpose of earning income from business or property (interest, dividends, rents or royalties – but not capital gains).
It's not necessary that you actually earn income from property each year to be entitled to a deduction federally, but there must be a reasonable expectation of earning income in the future. Quebec is an exception here. In that province, your interest deduction can only be claimed to the extent you actually report income, including capital gains, in a particular year (rental properties are an exception). Finally, interest on overdue taxes is not deductible.
If you're an employee you won't be able to deduct automobile expenses unless you have included in your income any allowances received from your employer. Generally, "unreasonable" allowances should be included in your income and actual expenses can be claimed. You might consider your allowance unreasonable if it is too low to cover your actual costs. If your expenses exceed your allowance you should consider opting to include your allowance in your income and claim your actual car costs.
Workspace in your home
Generally, you will be restricted from deducting any costs related to a home office if you are an employee except to the extent that the workspace is where you principally perform your duties or where that space in your home is used exclusively for the purpose of earning income from your office or employment and is used on a regular and continuous basis for meeting clients, customers or others in the ordinary course of your work. These are tough tests to meet. The same conditions have to be met for self-employed individuals to be entitled to deduct home office costs, but the tests are often easier to meet in the case of self-employment.
Costs related to vacant land
If you make an investment in vacant land, you could be restricted in deducting interest and property taxes. The rules are complex, so speak to a tax pro if you're in this boat.