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With the top marginal personal tax rate exceeding 50 per cent in more than half the provinces in Canada, it’s no surprise that some taxpayers are looking at ways to income split with a spouse or common-law partner. In a province like Ontario, where the top marginal tax rate is 53.5 per cent and the bottom rate is 20 per cent, that’s a spread of over 33 per cent.

There are a variety of ways to legally split your income with a spouse. They range from straightforward strategies, like pension income splitting or CPP/QPP sharing, to more sophisticated strategies such as using a prescribed rate spousal loan to have any excess returns above the prescribed interest rate (currently holding at two per cent) taxed in the hands of the lower-income spouse.

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While Canada’s tax system is generally one of self-reporting, there are a variety of checks and balances built into it to verify that taxpayers are, indeed, reporting their income properly each year. The most common method the Canada Revenue Agency has of checking up on us is to match the various types of income we report with the income that is reported on T-Slips, copies of which are electronically submitted to the agency by payors. For example, employers report employment income on a T4 slip, investment income is reported on T3 or T5 slips, the disposition of securities is reported by your broker on a T5008 slip and RRSP withdrawals are tracked on T4RSP slips.

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It may be tempting for some taxpayers to write off personal expenses as tax-deductible ones, especially under the guise of a business, but doing so could get your expenses denied by the Canada Revenue Agency and could even expose your prior years’ tax filings to reassessment beyond the “normal reassessment period.”

Indeed, this is exactly what happened in a recent Tax Court of Canada decision released last week in a case involving a taxpayer who was reassessed by the CRA in November 2018 for his 2013, 2014 and 2015 taxation years. The 2013 taxation year was reassessed after the expiry of the applicable normal reassessment period and thus would generally be considered to be “statute-barred.”

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“There is no place for the state in the bedrooms of the nation,” quipped the elder Trudeau back in 1967, when, as justice minister, he announced reforms to the Criminal Code that, among other measures, would decriminalize homosexuality.

But that famous statement doesn’t necessarily hold true when it comes to the taxman, who may indeed have a keen interest in what goes on in your bedroom, especially if you try to write it off as a home office.

Take the recent case, decided earlier this month, involving employment expenses. The taxpayer, a former Toronto-based marketing and communications consultant who now lives in Boston, was employed by a private company of which she was the sole director. Her job was to procure clients for the company’s advertising business.

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If you borrow money for the purpose of earning investment or business income, the interest you pay on that debt is generally tax deductible. But what if your investment turns out to be a dud and goes to zero — or you’re forced to shutter your business — while you still owe money on your loan? Should interest continue to be deductible for tax purposes long after the original source of that income has disappeared?

The answer, fortunately, comes in the form of a little-known rule in our Income Tax Act sometimes known as the “loss of source” rule. The rule, which has been in force since 1994, applies when the borrowed money no longer has the potential to generate income because the source of that potential income has disappeared. The rule, therefore, essentially permits you to continue to write off previously deductible interest expenses, even after the source of the investment or business income has disappeared.

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