When The Tax Credit Outweighs The Audit Costs

Our tax system is based on the honour system. And every once in a while, CRA sends us a letter (aka pre/post assessment review) requiring proof that what we are claiming on our tax return is legitimate and/or whether we are eligible to claim it.

Depending on what they are reviewing/auditing, the list of information they are requesting can be quite extensive and time-consuming. While some receipts, medical and donations for example, should always be in your records and therefore easily accessible, other documentation requests might not be as accessible. So, I think it's important to ask yourself...

“Is it worth my time in responding and providing what is being requested or is it better to forgo the tax credit/deduction altogether?”

Let me share an example. The Eligible Education School Supply Tax Credit. This credit allows Teachers and Educators to claim up to $1,000 of eligible school supplies that they paid for per year. If the full $1,000 was spent, it is a federal tax savings of $250 per year. To be clear, you spend $1,000 to save $250 in tax. This specific tax credit requires a significant amount of paperwork to support the credit, including:

1. All receipts. This should be the easy part as you should have kept the receipts to support the claim in the first place.
2. A letter or statement by you confirming the supplies were bought for teaching/facilitating students learning, they were directly consumed for the educators’ duties of employment, none of it was reimbursed by anyone, and they weren’t deducted from anyone else’s income for any year.
3. A letter from your Principal/Administration/Employer detailing why and how you are eligible for this tax credit. This part now adds even more people's time for their involvement, and we all know how busy our principals and admins are. Further, the post-assessment request for this information by CRA is often when schools are on summer break and with a 30-day requirement to respond, this could pose a problem for replying on time.

Now obviously every dollar saved in tax is great but when you look at the time involved by yourself, your Principal/Admin or Employer, and possibly paying a professional to respond to CRA, the $250 has likely just cost you more.

Let’s look at the Digital News Subscription Tax Credit. You can claim up to $500 on qualifying new subscriptions but when you calculate the federal tax credit which is 15%, the federal tax savings you have saved is $75 ($500 x 15%).

Another example is the Donation Tax Credit. If you have a handful of donations for $5, $10, or $20, it might be worthwhile to save and claim them when they are greater than $200. You see, when the total of all donations are $200 or less, they only qualify for a 15% tax credit but the total amount over $200 qualifies for a 29% tax credit and when your income is greater than approximately $235,675 (2023 amount), the tax credit on amounts over $200 is now 33% as opposed to 29%.

As you can carry forward donations for up to 5 years, not only do saving the receipts from multiple years when they are smaller amounts provide greater tax savings, but if CRA requests the donation receipts and/or other supporting documentation, the time spent by yourself and/or your accountant will provide a greater chance of offsetting the taxes saved with the amount of fees paid to your accountant and/or time you spent preparing the documents and replying yourself.

Now, if like most of my clients and you have audit insurance, then your professional fees would be covered and the only thing you need to consider is your own time. As I recommend to all my clients, you should already be keeping copies of all records, receipts and documentation that is needed for your personal taxes, so when it comes time to receiving one of these pre/post assessment review letters from CRA, you have everything saved and ready to send to your accountant and/or CRA.

At the end of the day, CRA is just doing the job the Federal Government has mandated in ensuring the tax filing honour system is respected by taxpayers. So, as much as some of these tax credits save us tax on our initial personal tax filing, consider how much your time is worth, and whether the tax savings outweigh your time and professional fees. If it doesn’t, you can always let CRA know you’ve decided not to claim the tax credit due to the professional fees and/or time that would be required to respond. Only you (and your Accountant) can decide if it’s worth it. Either way, when you have your documents organized and professionals to support or respond for you, the pre/post assessment review/audit should be nothing to stress about.

***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.