Deductions that may bite back

Your best chance at tax savings is in practice deductions — that's why auditors look
for cheaters here

By Charles Corvallis

You've just filed your 2005 taxes. You're feeling smug that they're finally off for another year; broke because of the staggering tax burden the profession carries in this country (the government giveth and the government taketh away); and a little nervous lest your return attract the attention of a Canada Customs and Revenue Agency auditor.

The paying of taxes is the duty of every Canadian, we have much to be grateful for and the government has had some part in making Canada the prosperous, protected place it is to live. Individual taxpayers also have a duty to each other to pay their fair share. You're not, however, obligated to pay more than your share. Indeed, you have a duty to yourself and your family to make sure that you take all the deductions you have coming to you. Never forget that the money you pay in taxes takes by far the largest slice of your lifetime income — for most physicians it's a sum that exceeds all their savings and mortgage payments combined.

The tax code is a dark forest full of potential savings and false turns that can lead to trouble. It's up to your accountant to steer you through this morass in a way which maximizes your savings yet minimizes the chance that your return will be too closely scrutinized. You can help in this process by understanding those items that are most likely to cause the tax department's computer to spit out your return for a closer, human look.

Travel deductions: Last November a Hamilton-based IM attended an oncology conference in Orlando and he took his wife and young son along. After the meeting the family took a four-day cruise out of Cape Canaveral to the Bahamas. His question to his accountant: How much of the trip can I write off? The answer: your return flight, ground transportation and meals for the time you were at the meeting and the difference between single and triple occupancy for your room in Orlando during the meeting. This conservative treatment of the expenses is unlikely to set off any bells and even if it did, an auditor would find the write-off perfectly legitimate.

Home offices: Some of your colleagues do paperwork and other medical tasks at home. You can take a deduction for the cost of the room in which this work is carried out — like heating, electricity and so on — as long as the room is used exclusively for profession-related tasks. If it doubles as guest bedroom or a family room, write-offs aren't permitted. Assuming it's on the up and up, the deduction is calculated based on the square metres the office occupies. A 50m² office in a 300m² house would qualify for a 16.67 % write-off.

You can also depreciate any furniture and equipment you use in the office over three to five years. Make sure your accountant is up to speed on what's in the room and on any new purchases. Don't go overboard on home-office write-offs, on this item a low profile is a wise profile.

Your car: You're permitted to deduct legitimate automobile expenses in proportion to the amount you use the car in your practice. Instead of guessing what percentage is used in your practice and what's personal, keep a log of the kilometres clocked on practice work (this is now required in Quebec). It's then a simple matter of calculating the 'office' use as a percentage of the total number of kilometres the odometer shows for the year. Apply the percentage against all automobile-related costs — gas, insurance, repairs, registration. Keeping track of those expenses is, admittedly, a chore. The easiest way to handle it is to keep a notebook and a folder for gas receipts in the glove compartment. Write down your kilometres on each professional trip and stash the gas receipts in the folder. Consider your professional car use expenses audit-proofed.

Keep personal and professional deductions separate: The money that comes out of the practice account is taxable as personal income. A Winnipeg FP opened a joint account with her husband when they were first married but, after just a year of marriage, found she resented the control over their finances the account gave her husband. She felt she needed some mad money of her own and opened a separate account to which she made 'secret' deposits. She forgot to include them in her income in 2003 and they, along with a couple of other items on her return, triggered an inquiry from RevCan, which resulted in a subsequent re-assessment.

Now that the tax season is over, accountants across the country are cleaning up their offices and preparing for a well-deserved rest. Give yours a month or two to recover and then make an appointment to go in and review your practice deductions with a view to getting every one you can — without raising any eyebrows at the taxation office.