Wondering whether that new air conditioning unit you installed last summer is an eligible medical expense for tax purposes? You aren't alone. The Canada Revenue Agency maintains a list of "common adjustments" resulting from its various tax return review programs.
While you might think there's no harm in trying to claim a questionable expense, the reality is that not only could the CRA disallow your deduction and reassess you but it could also hit you with non-deductible arrears interest, and in some cases, a penalty.
Here are three items from the list to pay particular attention to this filing season: "Line 232 – Other Deductions" & "Line 256 – Additional Deductions," interest paid on student loans and eligible medical expenses.
1. Other/Additional deductions
These lines are apparently used by a variety of taxpayers as a "catch-all" for various deductions. Although these line names may sound like they are meant to allow any number of miscellaneous deductions, they each have very specific purposes.
The CRA specifically cited the following examples of expenses that are non-deductible but tend to be claimed erroneously as other or additional deductions on these lines: legal fees you paid to get a separation or divorce or to establish custody for a child, funeral expenses, wedding expenses, loans to family members (that presumably went "bad") and a loss on the sale of your home.
Before filing your 2013 return, you may wish to peruse the "What You Can Deduct"1 section of the CRA's website to make sure that an expense is properly deductible before making the claim.
2. Interest paid on student loans
Student loan interest is eligible for a tax credit but only for interest paid on a student loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or a similar provincial or territorial government law. You can't claim interest paid on any other kind of loan, like a financial institution's line of credit.
A tax case decided last year involved two sisters who had borrowed money under a special student line of credit offered by their bank. While they tried to argue that the loans "must be sanctioned under some legislation because the bank is a federally regulated institution," this argument failed since the only federal statutes that qualify are the two acts listed above. As a result, their tax credits were denied.
3. Medical expenses
While on the CRA's website, be sure to also check out the list of eligible medical expenses2 before making your claim. For example, a recent tax case looked at whether the fees paid for processing and storage of cord blood was an eligible medical expense. Cord blood banking involves collecting stem-cell-containing blood from a baby's umbilical cord and the placenta after delivery. That cord blood is then processed and stored for potential future use in stem cell therapy and other blood diseases such as leukemia.
One of the criteria for claiming a medical expense is that the procedure must be either directed or recommended by a physician. The taxpayer tried to argue that since her "obstetrician extracted the cord blood, it must be inferred that that physician prescribed the processing and storage of the cord blood."
The judge disagreed with that interpretation and found that "'prescribed' means that the procedure or service must be recommended by the medical practitioner." Since it was the couple's choice to have their child's cord blood processed and stored, it was not specifically prescribed by the obstetrician.
And as for that new air conditioning unit? It can be a valid medical expense for a person with a severe chronic ailment, disease, or disorder but it must be prescribed by your doctor and you're limited to the lesser of $1,000 and 50% of the amount paid.