The bizarre stunts people pull at tax time

In his 15-plus years in accounting, Stewart + Associates founder Christian Stewart has seen some unusual tax deductions. Take realtors writing off clothing, food-service employees deducting groceries, or the self-employed gentleman who declared 45 percent of his home as office space. Then there was the cost of dog food claimed as a business expense.

“Dog food and dog grooming were written off under home-office security expenses,” Stewart says.

As Canadians start preparing their annual income taxes, now’s the time of year when financial experts get snowed under. At least the outrageous write-offs help keep things interesting.

“Today somebody is wanting to claim the cost of his cat’s vaccinations,” says Kelowna-based Grant Thornton LLP senior accountant Jean Boulianne. “I suppose some people consider their pets as their children [dependents], but CRA [the Canada Revenue Agency] definitely doesn’t allow the medical expense claim.

“One of my first clients submitted all of his pay-per-view pornography bills,” Boulianne adds. “I didn’t let him expense them.”

Stewart notes that the category of “advertising and promotions” is one where people tend to take a lot of leeway when it comes to attempted deductions.

“People go out and buy liquor at Christmas and state they’re buying it for a client when in fact they’re obviously buying it for personal use,” he says. “Same with diamond rings: Diamond rings and jewellery get dumped into advertising and promo catch-alls.”

Corporations push things too. A federal court in Louisiana recently rejected transactions by Dow Chemical Co. that created $1 billion in what the U.S. Justice Department called "phoney tax deductions".

The Canada Revenue Agency wouldn’t comment on specific cases, but H & R Block Canada (http://hrblock.ca/) shared these examples of deductions that didn’t fly with the federal organization:

- A trip down South: The cost of travel to Arizona could not be claimed as a medical expense even though the taxpayer’s dermatologist recommended trips to sunny climates to treat psoriasis. (Goodwin v. The Queen, 2001)

- Seizure of marijuana: The seizure of marijuana by law-enforcement authorities should not be treated as a “loss of inventory” deductible against the taxpayer’s income from illegal drug trafficking. (Neeb v. The Queen, 1997.)

- Lost footballs: The cost charged to a professional football player for balls he threw into the stands could not be claimed as an expense against his employment income. (Ellis v. The Queen, 1998)

- Gambling Losses: Losses incurred by a pathological gambler could not be deducted against his income. (The taxpayer in this case, who embezzled his employer to fund his addiction, was the subject of the movie “Owning Molony”) (Molony v. The Queen, 1990)

But sometimes you never know. These deductions passed CRA’s approval:

- Additional food needed by couriers: The Federal Court of Appeal ruled that the additional food required by a foot and transit courier because of the extra energy he expended could be claimed as a business expense. (Scott v. The Queen, 1998)

- Cat and dog food: A farmer was allowed to claim cat and dog food because they were outdoor pets that were acquired to keep wildlife away from his blueberries. (Zeitz v. The Queen, 2002)

An American exotic dancer got away with deducting the cost of her breast augmentation[1], but expenses associated with cosmetic surgery were disallowed by the Canada Revenue Agency in 2011. (Same goes for hair pieces.)

Stewart says it’s not uncommon for people to try to push their luck, noting that his company doesn’t condone questionable deductions.

“When you see things on the books that stand out we bring it to their [clients’] attention,” he says. “We’ll bring it to their attention, saying ‘This is going to be hammered in an audit, and you—not us--have to be able to justify that this is for business use. It’s a question of fact in many cases.”

H & R Block Canada senior tax analyst Cleo Hamel says people need to do their research before submitting the kind of deductions that raise eyebrows.

“We only think about taxes once a year and it creates that panic for most people, so they’ll grab at anything,” Hamel says. “But you need to be sure about what you can deduct.

“If you think you have a good argument to be allowed to claim something, instead of going ahead and claiming it, you can write government [the CRA] and ask them to give you a judgment,” she says. “Then once they’ve given you a written judgment you can go back can adjust your tax return. Otherwise, if there’s something the CRA disagrees with, your return is automatically adjusted, you get a tax bill that could take months or years to clear up, interest is accumulating, and there could be penalties. It saves a lot of stress to get it in writing first.”

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[1] http://www.forbes.com/sites/peterjreilly/2012/07/20/julian-block-on-cosmetic-surgery-as-a-business-expense/