The Canada Revenue Agency allows businesses to deduct a huge range of expenses on their tax returns, and if your clients want to keep their tax liability as low as possible, they need to claim all their eligible expenses. At the same time, your clients also need to ensure the expenses they claim are truly deductible. Unfortunately, there are a number of nondeductible expenses that businesses and individuals often mistakenly claim on their returns. Help your clients avoid these common errors.
Meal and entertainment expenses can be deductible. To qualify, the costs must be reasonable, and you must discuss business at the event. If those criteria are met, you can deduct half of your meal and entertainment expenses.
Due to those rules, some business owners think they can include wedding expenses as deductible business expenses. As long as they invite colleagues or clients and discuss business, they assume the expenses are deductible. That is not the case; with a wedding, the purpose of the event is the wedding, not business. Even if business gets discussed at the reception, the expenses are still not deductible.
Pets are becoming an increasingly popular fixture in many offices. On top of that, many daycares have pets to amuse the children. As a result, some taxpayers think they can write off the cost of pet food.
In most cases, your clients cannot write off pet food or other pet expenses. For example, the CRA denied a daycare operator from claiming the cost of her iguanas as a business expense, even though she argued she only bought them for the children in her daycare.
There are exceptions to this rule. Most notably, in 2002, a farmer won an appeal, and the courts decided that the cost of pet food for his working dogs and cats was an eligible business expense. He was using his cats to keep wild animals away from his crops. On top of that, individuals with service animals may be able to claim certain costs as medical expenses.
Most people buy special clothing for work, but you need to make sure your clients don’t claim these costs as business expenses. Even if your clients don’t wear the clothing anywhere else besides work, they cannot claim these expenses. They can only claim the cost of specialized uniforms.
In most cases, your clients cannot claim gambling losses as business expenses or as personal capital losses. Luckily, on the flip side of the coin, your clients also don’t have to declare their winnings as income either. As a general rule of thumb, the CRA considers gambling wins to be nontaxable windfalls. In that same vein, lottery wins are also windfalls and not subject to income tax. The only exception is for cases where the taxpayer is running a gambling business. The tax courts decide this on a case-by-case basis.
To be on the safe side, review the expenses your clients claim closely. If any claims look suspicious, go over them with your clients and make sure they have the supporting documents. If you think the expense is not deductible, advise your client to remove it from its return.