With tax deadlines behind you, many dentists and their accountants view summer as the season to forget about taxes. However, summer may be the busiest season for CRA, this is the time when CRA assesses tax returns and starts asking for receipts. It is also when CRA reveals what’s on its radar. Here’s a list of the most commonly reviewed and audited items from this past tax season.
CRA will often target a very specific expense. This past year, many dentists have received letters asking to review their professional fee expenses. This typically includes legal, accounting and consulting fees. Dentists get in trouble when they include expenses items such as legal fees related to a personal matter such as a divorce or accounting fees related to a reorganization/incorporation where the fee should be claimed over many years instead of expensed all at once. These, typically, result in higher than normal professional fees which triggers the review. Other targets include excessive bookkeeping fees or consulting fees paid to a family member. Whenever fees are paid to family members, they should be reasonable based on the work provided.
In recent years CRA has expanded its list of qualifying medical expenses which has led to an increase in medical expenses being claimed. For many dentists, medical expenses are paid out-of-pocket and as a result, these large medical expenses trigger a review by CRA. A medical expense which has caught CRA’s attention is in-vitro fertilization (IVF) treatment. Many of the expenses related to IVF treatment are legitimate claims, however, a few are not. These include payments to or on behalf of a surrogate as well as vitamins and supplements for IVF treatment. A notable and allowable medical expense is medicinal marijuana which can be claimed if it has been prescribed.
One of the most common reasons CRA may want to meet with you is for a payroll audit. The T4 is one of the most important tax filings for CRA because most Canadians are employees and they need their T4s to file their income tax returns. Errors made in relation to payroll will more often than not trigger a payroll audit. During the audit, CRA will review whether the pay cheques issued to staff match the T4 filings. They will also review whether subcontractors/self-employed staff should really be employees. Refer to your complimentary copy of ODA’s Dentist’s Tax & Financial Guide which outlines the factors in determining whether an individual, including a dentist, is an employee or independent contractor. This book can be obtained directly from the ODA.
If there’s one thing you want to get right with regards to taxes, it’s payroll. This means paying all remittances on time and making sure your T4s are correct and the appropriate taxes have been withheld. Consider using a payroll service provider to save you time and headaches.
Although dividends were not a target in the past, with the new tax changes, we expect dividends to be on CRA’s radar for 2018. Refer to our article which appeared in the January 2018 edition of Ontario Dentist that outlines the new reasonableness test being applied to dividends to family members. This will help you determine when you should and shouldn’t pay dividends to family members. Also, make sure you have the documentation and support to justify large dividends to family members as we expect this to be a common request in the future.
In addition to the above list, CRA is always on the lookout for expenses which may be more personal in nature. These expenses are always on CRA’s radar and include: meals and entertainment, travel and automobile expenses, insurance (life, critical illness and disability), advertising and home office expenses. Reviewing these expenses with your accountant will give you a better idea of what’s deductible and what’s reasonable.
There’s nothing wrong with tax planning and claiming expenses incurred for the purpose of earning an income. However, in tax planning, avoiding an audit is much better than trying to win a battle with CRA. Knowing what they are looking for will help you do just that.
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail firstname.lastname@example.org / email@example.com / firstname.lastname@example.org . Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.