CRA Red Flags: 3 Tax Breaks That Are Often Denied

Are you getting ready to file your taxes for 2024?

If so, you’ll want to keep track of the tax credits and deductions that you’re eligible to claim. Claiming such tax breaks is the easiest way to lower your tax bill. However, doing so comes with risks. If you claim tax breaks that you aren’t actually entitled to and get audited, you can find yourself having to pay extra taxes. So, it’s wise to play it safe with tax breaks. In this article, I will explore three categories of tax breaks that frequently get denied by the Canada Revenue Agency’s (CRA) auditors.

Home office

Home office expenses are among the deductions that CRA auditors often look upon with skepticism. The reason is that in order to claim a home office legitimately, the space needs to be wholly dedicated to work, with no second purpose. If you have a home office that doubles as a laundry room, and a CRA auditor gets wind of it, any expenses you claim related to it will likely get denied. So, if you’re claiming a home office on your tax return, make sure you use the space exclusively for work.

Moving expenses

Moving expenses are another category of expense that frequently gets denied by auditors. The reason for this one is a technicality: for moving expenses to be considered work expenses, your new home needs to be 40 kilometres closer to work than your old home was. This yardstick, known as the “40-kilometre rule,” is designed to prevent people from claiming non-work related transportation costs as tax deductions.

Tuition expenses

Last but not least, tuition expenses are frequently denied by CRA auditors. The main reason for a tuition expense claim to be denied is the taxpayer trying to claim tuition from a non-eligible institution. Tuition expenses only count if they are paid at an eligible Canadian or qualifying foreign institution. Recreational cooking classes or piano lessons from a private tutor do not qualify. If you claim such expenses on your tax returns, you should hope that you don’t get audited, as they are likely to be denied.

One that doesn’t get denied

If you’ve read this far, you’re probably feeling a bit apprehensive about claiming the expenses above on your tax return. Ultimately, what you should do is speak with an accountant; they will let you know what you can legitimately claim. In the meantime, here’s one credit that is almost never denied: the dividend tax credit.

The dividend tax credit is a credit on the “grossed up” amount of dividends from a qualifying Canadian stock. All large-cap Canadian stocks are eligible for both the gross-up and the tax credit. Consider Fortis (TSX:FTS), for example. It’s a utility stock with a 3.84% dividend yield at today’s prices. Such a yield can produce considerable dividend income.

As you can see in the table below, a $100,000 investment in Fortis produces about $3,772 in annual dividend income.

So, Fortis stock pays quite a bit of passive income. And every penny of it is eligible for the dividend tax credit! Here’s how the tax credit saves a hypothetical investor with a $100,000 Fortis position money:

• $3,772 in dividend income is grossed up to $5,205.
• A 15% Federal credit is $780.
• A 10% credit for Ontario, for example, is $520.
• These amounts sum to $1,300, which is subtracted from the investor’s taxes owing.

As you can see, the dividend tax credit can save you quite a bit of money. And claiming it won’t land you in hot water with the CRA.