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Benjamin Franklin’s classic quote, “There are only two things certain in life: death and taxes” may hang dark, but holds true nonetheless.
While we are exposed to taxes on purchases from an early age, it is only once we start earning that we must worry about the taxes being deducted from our incomes.
In Canada, the Canada Revenue Agency (CRA) is responsible for the administration and collection of federal income tax, governing all provinces and territories except Quebec. But while taxes are a certainty, tax filing can be challenging especially for first timers. Here is a refresher course on what to expect, how to file and optimize your income tax return if you are either an individual or a small business owner.
Canada follows a progressive tax system meaning that as your income increases, your marginal tax rate also increases. Income taxes are most often deducted directly from your earnings and tax is applied accordingly based on the taxable income you generate (calculated as total income minus deductible expenses). If your employer does not deduct tax automatically, then you have to self-report and remit the taxes to the government at the end of each tax year.
When filing your tax return, you will encounter the T1 Tax and Benefit Return form which you fill out and submit to the CRA to gain your refund. In this return, you enter the details of the income you earned through working, investment gains, monetary profits etc. The CRA then assesses this information and compares it to their own records to calculate the amount of tax owed. If it turns out that you have overpaid, then you receive a refund. If you have underpaid, then you owe that amount to the government.
As noted above, taxes are only paid on taxable income defined as total income minus deductible expenses. These deductible expenses can include items such as Registered Retirement Savings Plan (RRSP) contributions, childcare expenses etc. From this taxable income, you are then allowed to deduct items like employment insurance premiums, tuition costs, medical expenses and/or charitable donations. Finally, once these items have been deducted, a tax rate is applied. There are 5 main brackets that Canadian income earners fall in. Depending on the taxable amount you have reported, you would be expected to pay:
Bracket 1: 15% on the first $47,630
Bracket 2: 20.5% on the next $47,629
Bracket 3: 26% on the next $52,408
Bracket 4: 29% on the next $62,704
Bracket 5: 33% on income exceeding $210,371
Before detailing the options available to individuals for filing a tax return, keep in mind that the tax filing deadline is April 30 of each calendar year if you are employed by an employer other than yourself. If you are self-employed, this deadline changes to June 15. Now that that’s out of the way, let’s look at how returns can be filed:
If you are comfortable doing it yourself, filing taxes online is the quickest, cheapest and most convenient way to do it. With several online options currently on the market (including TurboTax, SimpleTax, UFile etc.), you also have plenty of tutorials on how to do it if it’s your first time.
An alternative way is to get file taxes and mail them to the tax center. If you are pursuing this option, remember that each individual’s returns have to be mailed and delivered in separate envelopes.
If you find that it’s better to have someone else take care of the tax returns for you, you can find a professional accountant in your neighbourhood or vicinity. There are also firms like H&R Block who will charge a nominal fee to help you with each step of the tax filing process.
Starting from the 2019 tax season, the CRA has a program to assist low-income individuals complete their tax returns through an automated phone service. This program is available only to eligible people though, who will be notified via mail. If you have received this mail, please note that this is an entirely free option.
In this program, there are tax clinics set up across Canada that assist individuals with modest incomes and simple taxes file their returns. Most universities and colleges will have one, so if you are a student, look out for these around March to April of each year.
The option that you ultimately select is entirely dependent on you. If you do not have a particularly complex set of circumstances, then filing your returns yourself is certainly the most cost-effective option. However, in some cases, if you have complicated issues with your tax returns, then a professional would be best equipped to handle them. In some cases, the accountant may also be able to surface more value in your tax return filing due to better knowledge of the processes and procedures.
If you’ve decided to take matters into your own hands and file your next tax return yourself, congratulations! Below is a step-by-step guide for how to do this:
The first stage of tax filing involves gathering yours and your dependents’ (if any) personal information and documentation. This will be used to support any credits, deductions and/or expenses that you submit as part of your return.
Browse online for the various filing software you can utilize to fill out your tax returns. Depending on your budget and needs, you could either opt for a paid software or some of the free online tax filing available.
Once you have chosen a filing software and created your account on it, it’s time to really get into the weeds with the taxes itself. Recently, the CRA has rolled out the Auto-fill for users who are enrolled in their My Account service. The Auto-fill will automatically populate the details that the CRA has on file for an individual if the individual is completing their tax return online.
The first step is to address the basics i.e. marital status, number of children, home address, and bank account information. If any of this has changed, make sure you update the relevant section accordingly.
The second step is to report your income. This can be income earned from your employer, self-employment, benefits that you have received, and any investment gains that you made. All income made from within and outside Canada must be reported (including cash from tips, bonuses, and side gigs).
Lastly, you can claim several deductions, tax credits and expenses provided you have reasonable evidence to back them up. Some examples of these include transit passes, childcare expenses, political contributions, student loan interest, moving expenses and exams for professional certifications.
Once you have filled out the form, send in the return. If you have filed online through a NETFILE-certified software, the software will directly transmit your information to the CRA. Print the confirmation page out for your records too. If you are sending the information by mail, then mail the completed tax package to the appropriate tax center. At this point, also keep all receipts of expenses, credits and deductions with you in a safe place. You may need these later if you are sent a request for proof by the CRA.
If you have got a refund on your tax amounts, then it can take as little as 8 business days if you chose to file your returns online to 8 weeks if you sent in a paper return by mail. If you have registered for Auto-deposit, the money will be transmitted into your account directly.
On the other hand, if you have a balance owed, then it is critical to pay this off by April 30 of the year. Any delays in this payment can negatively impact your credit score and cause interest to be charged on the outstanding amount as well. If you are unable to pay the full amount at this point, then contact the CRA to make a deferred payment arrangement. In some cases, the CRA will provide relief from any interest charges or penalties.
If you find that you excluded some information by accident and need to make a change, wait until you get your Notice of Assessment from the CRA before proceeding to make any changes.
To recap, here are the most important dates that you need to be aware of when making your returns:
– Deadline for individuals who are not self-employed to file and submit tax returns
– Pay off all outstanding tax balances by this day to avoid interest and penalties
– Deadline for self-employed individuals to file and submit tax returns
Structuring your tax refund is not complicated. But to ensure that you are not leaving money on the table, here are some helpful tips:
Daycare expenses that you paid throughout the year and/or any camps attended by the child when not with their regular care provider are tax-deductible. These must however be deducted by the spouse with the lower income.
Payments made to a former spouse for spousal support and/or child support can be deducted from total income.
Interest on the original post-secondary institution student loan is tax-deductible. However, apply this deduction only in years that you owe taxes in. If you do not owe any taxes, it is better to carry it forward for up to 5 years.
There are quite a few financial benefits to contributing to an RRSP, which is why most financial advisors would recommend that you maximize your contributions in any way you can.
Depending on which province you are in and whether you are a landlord or a tenant, you may be able to deduct property taxes and rent payments made. It is pertinent to note that this is also dependent on overall income.
On top of the federal and provincial GST/HST credits that are provided, most provinces have their own additional credits for energy usage, transit etc. that can be capitalized on to improve your tax refund.
Make sure to save your charitable donation receipts and inquire about whether they are eligible for any kind of credit.
If you have moved 40 kilometres or more to be closer to your workplace, new business, or post-secondary education, moving expenses can be claimed in accordance.
Any interest or earned in TFSA or RRSP accounts is considered tax-free although this doesn’t directly impact the tax deduction.
For investments that have a realized loss i.e. they have been sold at a loss already, the loss can be reported on taxable income. This only applies for investments that have been closed out. For investments that are still held at a loss, this does not apply. If you do have an investment in a non-registered account at a loss that you want to continue holding, it could be worthwhile to transfer it to a RRSP.
For people filing by themselves, avoid filing late as much as possible. The CRA charges hefty penalties if you have a tax amount owing and have filed later than the deadline date.
For unavoidable expenses paid by Canadians with disabilities, the DTC is designed to provide financial relief. A licensed medical professional must fill out and certify the condition for a person to be approved for using this credit.
