Deductibility Eases Tax-Preparation Pain

Do you struggle every year to complete your income tax return?

Consider hiring a professional tax preparer to handle this unpleasant chore. That way, you leave most of the hassle to an expert who knows the ropes.

Such services don't come free, of course, but might cost less than you expect. Depending on your income sources, you should be able to deduct at least a portion of the fee.

The tax law states that all taxpayers, including those who report non-business/property income such as salary or capital gains, may deduct fees or expenses paid for advice or assistance in preparing, instituting, or prosecuting an objection or appeal related to:

  • An assessment of tax, interest or penalties under the federal Income Tax Act or any provincial Income Tax Act.
  • A decision of the Canada Employment and Immigration Commission, the Employment and Insurance Commission, a board of referees, or an umpire under the Employment Insurance Act.
  • Any foreign income tax assessment where the foreign tax is deductible.
  • Or an assessment or decision under the Canada Pension Plan or a provincial pension plan.

If the Canada Revenue Agency (CRA) informs you that your income, deductions, or credits for a given year are going to be reviewed, you can deduct any legal and accounting fees that relate to obtaining advice and assistance in making representations to CRA. This applies whether or not you file a formal notice of objection or appeal.

On the other hand, if you do appeal an assessment of your tax, interest charged, or penalties, and the court awards you legal costs, you must include these amounts in your income in the year the award was received.

If the appeal relates to your business rather than your personal tax, the situation is basically the same - except that costs would be accounted for on an accrual rather than cash basis.

Generally speaking, deduction of fees is not allowed for personal income tax preparation or personal tax planning advice. But if you're self-employed, reasonable expenses incurred for advice and assistance in preparing and filing your tax return are usually deductible under the general rules for expenses paid in the course of earning income.

If you have extensive investment or business activities, or are otherwise entitled to deduct expenses from employment income such as commissions, you can likely claim the entire fee for preparation of your income tax return. Under these circumstances, deductibility is allowed on the basis that most of the fee relates to accounting charges for detailing net business or investment income or employment expenses.

The bottom line is that if you have numerous investments or business activities to account for, fees for tax return preparation will most likely be entirely deductible. And a reputable tax preparer will have the knowledge and expertise to make sure you take advantage of all deductions and credits available to you.

By thus maximizing your tax savings, you could even make more money than you pay out for professional services.

Remember, too, that it's important to keep accurate, up-to-date records throughout the year. Not only are good records a requirement of the Income Tax Act, they will enhance your tax preparer's efficiency and ensure that all of your eligible deductions and credits are trapped in your tax return.

Detailed records also will support your claims should you ever be audited by CRA. So, forget about the old shoebox method of record and bookkeeping and switch to a detailed paper record book or one of the many computerized accounting systems now available. It'll save you money in the long run.