Are you wondering whether that item you just purchased is deductible for tax purposes? Or whether an amount you received is taxable? There’s no shortage of stories to tell about taxpayers who got it wrong – or right, for that matter. Here are a few facts about income, deductions, credits and some stories to consider as you prepare your tax return this year.
Illegal activities
Are you making money carrying on some type of illegal activity? If so, you should be reporting that income. Now, there are some drawbacks to this, as you can imagine. Since 2015, the taxman has been able to hand the police possible evidence of serious crime when it’s uncovered while reviewing taxpayer files. On the other hand, if you’re ever convicted of the crime, you can be sure the Canada Revenue Agency (CRA) will step up and check to see that you’ve been reporting the income.
Medical expenses
Many people don’t realize that you can claim any eligible medical expenses incurred in any 12-month period that ends in the calendar year. So, pick the 12-month period ending in 2017 that provides the highest amount of medical expenses (provided you haven’t claimed them in a prior year). Eligible medical expenses now include gluten-free products (you can deduct the difference between the cost of these products and the cost of those with gluten). Based on the case Goodwin v. The Queen (2001), trips to Las Vegas, Arizona and similar places can’t generally be claimed, even if your dermatologist recommends more vitamin D or a warmer climate to treat your psoriasis. Some travel costs may qualify, though.
Pet issues
Normally, pet costs are considered personal and can’t be deducted. But in the case Zeitz v. The Queen (2002), Mr. Zeitz was able to deduct the cost of vet bills, pet food and a fence for the dog, since his dog and cat were used to keep wildlife away from his blueberries on his farm – a source of business income. Another taxpayer wanted to deduct costs of travel and food for his pooch since his dog was the subject of a book he wrote and the two travelled the country to sell the book. The taxman allowed the business portion of those costs but would not allow the personal portion or capital expenditures (such as the cost of the dog itself). The bottom line? Any time you’re carrying on a commercial activity, you can deduct reasonable costs incurred to earn income from that activity – hence the value of having a home-based business. As an aside, an employee who received pet insurance provided by his employer was taxed on the value of that benefit, which highlights another general principle: You’ll face tax on any personal benefits your employer provides (there are a few exceptions).
Gambling losses
With the popularity of online poker and the like, is it possible to deduct losses you might incur? The story of Tarascio v. The Queen (2012) sheds light on this. Mr. Tarascio lost the battle because the judge decided he was not carrying on a business in his gambling activities. If a person, however, shows special knowledge or skill in an activity and displays the hallmarks of carrying on a commercial activity, he or she would be taxable on any winnings and could deduct losses. But if your gambling is a hobby, losses won’t be deductible.
Employment expenses
If you incur certain costs related to your work, will they be deductible? Take the case of former pro football player Craig Ellis, who was an employee of the Edmonton Eskimos. He was asked by the team to speak to a group of young offenders, who he then invited to attend an Eskimos game. He thought the team would pay for the tickets, but they initially required him to pay the full cost. After negotiating, the team paid for half, but Mr. Ellis paid the other half and deducted the cost. Also, when he scored a touchdown, he tossed the ball into the stands, and the CFL charged him $75 for the ball (half its cost). He deducted a total of $596 for the tickets and ball. Mr. Ellis argued that the tickets and football were supplies necessary in the performance of his employment duties. The taxman and the courts disagreed. He was earning employment income only, and these were employment expenses that were not supplies being consumed during his employment. If he had earned any self-employment income from endorsements, he could have deducted these costs against that income, but this wasn’t the case. The general principle is that employees are permitted very few deductions other than certain costs they are required to pay for personally (check out CRA’s Guide T4044 online at www.cra.gc.ca).
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
Tim Cestnick