Talking Tax for Friday, April 21, 2017
Lorn Kutner, tax partner at Deloitte
Focus: Tax planning
WHY YOU NEED TO FILE A TAX RETURN
Many Canadians who expect to be in a refund or who earn income that is less than the personal tax credit say, ”Why do I need to file a tax return?” Well, here are a few reasons why:
- If you expect to be in a refund, then why let the government sit with money that you’re entitled to? They’ve had your money for part of 2017 and for all of 2016. Don’t you think it’s time for them to give it to you? If you’re expecting a refund, you should be filing your tax return as soon as the forms are available. That way, you can get your refund quicker and make your money work for you, rather than having your money working for the government.
- You received a salary during 2016 and even if no tax was withheld, filing a tax return can generate RRSP contribution room (18 per cent of the salary) in the subsequent year. If you do not file your return, that RRSP contribution room will be lost forever.
- You’re a student and other than earning a small amount during the summer you have no other income. Even though the student would not have taxes to pay, they need to file a tax return in order to substantiate the tuition tax credits available to them or their relative. A transfer of up to $5,000 (federal) of unused credits can be made to a parent, spouse or grandparent to help reduce their tax burden. The balance can be carried over indefinitely to be used to reduce the student’s taxes in the future.
The moral of the story: You never know really what you’re entitled to until you complete your tax return, so don’t procrastinate. File your tax return and see what hidden jewels you might find.
WHAT'S MY LIKELIHOOD OF BEING AUDITED?
There is a chance that someone with whom you have had a falling out with (e.g. a fired employee, a scorned lover, a jealous neighbour) could call the CRA and snitch on you in respect of a business expense that was actually a vacation, an unreported offshore account or even something that is totally made up. This may be enough for CRA to come knocking. However, it’s more likely that CRA will select you for a review of a specific claim on your tax return, like:
- Expenses (especially those related to a car) claimed against commission income
- A disproportionate interest expense in relation to the investment income reported
- Medical expenses
- Child-care claims
In all the above cases, you are just providing back-up information; these are not audits.
My advice: Don’t panic. Just answer the CRA’s questions as quickly and succinctly as you can. Treat it as if you were being questioned on a witness stand — “yes” and “no” answers where possible and don’t elaborate beyond what is asked.
IT’S APRIL 21 — IS IT TIME TO PANIC?
Absolutely not. Because April 30 falls on a weekend this year, the filing deadline has been extended to Monday, May 1 and for those of who are self-employed, there’s just under eight weeks left to file as these individuals have a filing deadline of June 15. Most of our financial circumstances do not change much from year to year, so review your prior year’s tax return and gather the similar information from your files. By now, you have received all of your T slips, so make sure they’re all there (and call CRA to confirm that you have them all) and then focus on the things that can reduce your taxes (e.g. donations, medical receipts, child-care expenses, RRSP slips). Once you think you have all of the information, set aside two hours to input the information into the tax software. Once you’re done, take a day off and then review it to see if you catch any mistakes. Does the result seem reasonable based on prior year returns? If you think you owe taxes, best to make every effort to file on time and avoid the late filing penalty. You always have the ability to amend the return after you have filed.
Taxpayers need to acknowledge that income taxes are the largest expense that they have each year and while we spend lots of time trying to manage our other living expenses, we spend a disappointing amount of time thinking about how to manage/reduce our income tax expense. The best time to start that process is right after you’ve completed this year’s tax return. Speak to a professional to see if you’re missing opportunities to reduce your tax. Hopefully at this time next year, you’ll have filed your tax return, received your refund and are enjoying the results of your efforts.