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Disproportionate expense claim guarantees CRA audit

Getting audited is not the end of the world, but it can be stressful for taxpayers — and there are certain claims that will almost certainly trigger a closer look by the Canada Revenue Agency (CRA), Toronto tax attorney David J. Rotfleisch tells Newstalk 1010’s The Night Side.

One of the most common reason for an audit, Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, tells listeners, is a claim of unreasonable expenses.

“It’s a question of the size of the expense, as compared to the size of the revenue. So if you are claiming $20,000 of gross revenue and you are claiming $15,000 of travel expenses, guaranteed you will be audited.

“Now, it could be that the nature of your business is you are doing sales door-to-door and you were in fact travelling all over the place and you incurred $15,000 worth of travel expenses — so be it. If you incurred it and document it, claim it. But you will be audited, just because the scale of the expense, as opposed to the income — its disproportionate,” Rotfleisch explains.

During the show, Rotfleisch also responded to questions from the public via phone, email and text, with one caller wondering whether she might be missing out on any tax deductions related to working from home for her company.

Rotfleisch explains that employees working from home can claim a home office expense, which means they would allocate part of their rent or mortgage and related expenses as employment expenses.

“If you are an employee, your employer should be providing you with a form T2200, which says that you’re required to work from home and you’re required to supply some of your own equipment or whatever it is that you need to supply,” he adds.

Another caller asked whether a monthly payment he receives for hosting a foreign exchange student from Beijing should be claimed as extra income, and if so, whether there are any strategies he can employ to minimize the tax implications.

As Rotfleisch explains: “So, first instance, you have to declare the $850 a month as income. However, you’re running this as a business, which means all the expenses which are directly related to you hosting the foreign exchange student are deductible. So, the most obvious one is food. Whatever food you can allocate and show is going toward this person is deductible. I would say that part of your accommodation should be deductible, so you are providing this person with a bedroom, so you should be able to allocate a portion of your rent or your mortgage, plus your utilities to offset this income.”

One listener expressed a concern as to whether his live-in girlfriend’s lack of responsibility with her taxes could affect his finances.

Rotfleisch says that while the woman’s tax problems are her own, there may be scenarios where her issues could affect her boyfriend. The most obvious one, he says, would be if she transfers property or money to him when she has a tax liability. In that case, Rotfleisch explains, the CRA can track those funds.

“If she has not filed her returns for a number of years, the way that she should solve her problem is through a voluntary disclosure. It means you go to CRA before they come to you and there are no penalties, no prosecution and a break of interest,” he says.

And, in response to a text question as to whether there is a limit to the amount you can sell on eBay before you have to claim it on your tax return, Rotfleisch cautions that the CRA is carefully scrutinizing the shared economy.

“Any income that you earn from Internet sources, from Uber, from eBay, has to be reported, from dollar one onwards. Now, again, claim all of your expenses, but if you are renting out occasionally on Airbnb, you’ve got to declare it.”

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