It’s that time of the year when most wish they had been taught a thing or two about taxes instead of the Pythagoras Theorem in grade school. Thinking about filing taxes gives everyone the jitters, but it is not such a daunting task – especially in today’s world where you have automated tax-filing software such as TurboTax and H&R block. Most of this software is directly connected to the NETFILE, or EFILE service provided by the Canada Revenue Agency. Furthermore, you do not have to worry about making mistakes because the CRA allows you to rectify errors by using a T1 adjustment form.
Should you file a tax return?
If you are a Canadian resident the answer is YES! This is true even if you are a student who is not earning any income. In fact, university students are advised to file returns because they can earn tax credits for their tuition, transit and textbook expenses, credits that can be used against future tax obligations. If you have an income you will be penalized if you don’t file taxes and you owe money to the CRA. The penalties consist of 5% of your balance owing as an upfront one-time penalty, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months (for 2016).
It is important to understand that there are very few reasons to not file your tax return. As mentioned before, software simplifies the process, and you can always hire an accountant or seek the help of a tax clinic. Approximately half of Canadians ended up receiving an average refund of $1682 in 2015, so why wouldn’t you want to file? Furthermore, filing taxes entitles you to receive GST, child tax and other provincial/federal benefits, beneficial for those with little or no income.
How do I get the best refund?
To receive a refund one needs to make the necessary tax deductions. Unfortunately, many Canadians aren’t aware of the numerous deductions that are available. For instance, you can claim home renovations if you are caring for someone with a disability, and travel expenses if you had to travel more than 40 kilometers to receive health care. Using public transit is not only a great way to help the environment, while saving parking/fuel costs, but also a means to minimize taxes. Be aware that only monthly and annual passes would qualify here. Other deductibles include relocation expenses for school or work, RRSPs, charitable and political donations, childcare expenses etc. Listing each and every possible deduction is beyond the scope of this article, but the point that we are trying to make here is that you should do some research as you may be pleasantly surprised with what deductions you are eligible for. You can check out the list of CRA eligible deductions for the current tax year here.
Reducing taxes on your investments
If you are an active investor, the Tax Free Savings Account (TFSA) is an excellent option to reduce your tax bill. Registered investing account earnings are considered taxable, as well as RRSPs(when you pull them out). Remember that although investment gains that are not in a TFSA are taxable, investment losses not contained in a TFSA are also considered capital losses, and can be deducted. The Globe and Mail has an excellent article about making the most of investment losses located here. As you would have already surmised, contributions to and withdrawals made from the TFSA account are not taxed. In fact, you can use this account to make investments, and returns in the form of capital gains, interest, and dividends are tax-free! Hence, it is a waste to NOT be somewhat aggressive with your TFSA, make investments where you can earn at least a 7% return. This can be achieved by investing in blue chip stocks such as those of Canadian Banks. If you are currently making a modest income(30-70k) and are investing in RRSPs before maxing your contributions to your TFSA, you may be making a mistake. You can check out our review of the TFSA vs your RRSPS here to see which account is right for you. If you are looking to open a TFSA then the first step is to head to your local bank, or open a TFSA through an online brokerage. Here’s a review of the top 5 brokers in Canada and the US to help you get started. Other sources of money that can qualify as tax free can include earnings from lotteries, gambling and wager winnings; inheritances in most cases; gifts to a certain limit; and capital gains from personal property.
How many tax returns do I have to file?
In the case of Quebec, you would need to file provincial and federal tax, but only federal for all other areas in Canada. Also, you can file taxes as early as January provided that you have your T4 slip or know what the numbers on your T4 slip will look like. However, the CRA will not review your file until mid-February.
How should I spend my tax return?
All this effort of reducing your tax bill would be futile if you aren’t prudent with your tax refunds. Unfortunately, all of us are guilty of or susceptible to spending refunds on non-essentials. But with a little bit of discipline and forward thinking, we could use the proceeds to make our lives easier. For instance, instead of buying that new flat-screen TV, create an emergency fund that you can use for a rainy day. Pay off your credit card debt instead of leasing a new car. Think about investing in a house instead of taking a vacation. In other words, the options to be intelligent and frugal are limitless.
Finally, a word of caution, stay away from anything or anyone that promotes “no tax obligations.” As mentioned before, every Canadian resident has to pay taxes in some shape or form. Thus, individuals or agencies that promise zero obligations are definitely running a scam.
We hope that this article served as a quick yet informative and useful introduction to taxes in Canada. For those of you who are visual, check out this infographic for a clearer explanation of the process:
About the Author: Dan Kent writes about investing and money on StockTrades.ca. You can visit his blog to learn more about investing, taxes, and budgeting (even if you’re not Canadian).