Here is a shortlist of common tax mistakes which trigger reassessments.
- Automobile expenses
When claiming auto expenses, you need to provide evidence supporting the auto expense allocation between business and personal use. The tax auditor will ask for a logbook that tracks the extent of your business driving. If you don’t have a log, the auditor can deny all your automobile expenses, including gas, insurance, repairs, etc.
- Meals and entertainment
Make sure you have proof that the expense was not personal but was incurred to generate practice income. If you give patients or colleagues gift certificates for a restaurant, you can only deduct 50% of the cost, even if you do not participate. A gift certificate for tangible items, on the other hand, can be written off in full.
Any expenses for food, cocktails, and entertainment available to your staff are not subject to the 50% limitation.
- Shareholder loans
Transferring funds from your corporation to yourself is considered a shareholder loan. You have to report these shareholder loans as a taxable dividend or as a salary. Even if the corporation borrowed the funds for the shareholder loan, they are still taxable to you. The tax auditor will scrutinize the shareholder loan transactions to ensure that they are either repaid or reported as income.
- Salary or dividends to family members
A salary paid to a family member is subject to the reasonableness test. Suppose you arrange for family members to get dividends from your Corporation. In that case, you avoid the reasonableness test, but the dividend is subject to the Tax on Split Income (TOSI), which means a tax at the top marginal tax rate.
If your company is a Qualified Small Business Corporation (QSBC), the capital gains from QSBCs are not subject to the TOSI rules. Therefore, you may be able to split income with family members by converting a dividend subject to TOSI to a capital gain.
