Tax

Taxes

The concept of taxes was perhaps best encapsulated by Benjamin Franklin, who said that “in this world, nothing can be said for certain, except death and taxes”. But while taxes are often seen as an arduous process, they are the most important source of revenue for governments who then use the funds to pay for services such as the free healthcare and education we enjoy in Canada, as well as other essential services like the police force, firefighting services, and infrastructure (libraries, roads, bridges, etc.).

Most Common Forms of Taxes

Employment Income Taxes

Effectively, you pay a portion to the government for each dollar you earn beyond a certain threshold.

Sales Taxes

Examples are GST, PST, HST, and QST. This applies to most goods and services produced in Canada. Depending on the province you live in, one or a combination of the above may be applied to the base price of goods. Note that the provinces of Ontario, New Brunswick, Newfoundland & Labrador, Nova Scotia, and PEI harmonized the Provincial Sales Tax (PST) with the GST to create the HST. This might sound confusing, so here is a table explaining the sales tax that consumers pay by province.

Sales Taxes

Property Taxes

Municipal governments usually charge property taxes based on the tax-assessed value of land and buildings.

Contributions

Contributions made by employers and employees to social security plans such as the Employment Insurance (EI) system, the Canada Pension Plan (CPP), and the Quebec Pension Plan (QPP).

While there are other forms of taxes that consumers are liable to pay depending on their particular circumstances, most Canadian consumers will end up paying most of the above at some point in their lives.

Importance of Tax Filing

This section will focus on income taxes since that is likely the bulk of the taxes you pay. In addition, property and sales tax are somewhat non-flexible; depending on your province, you have to pay a fixed amount with no exceptions. On the other hand, there are ways that you can be strategic with your income taxes, as we will see later. Each year, Canadians who have generated income through one or more income sources have to file a tax return document that details the level of income generated and other deductions made. Once submitted, you can obtain either a refund (i.e., the government will send you back some tax money you paid over the year), or you will have to pay an additional amount if it is determined that you still have some taxes owing on what you earned.

It is absolutely crucial that you file your taxes each year regardless of whether you expect a refund or have funds owing. There are penalties involved with not filing on time to the tune of 5% plus 1% for each month that it is late. Note that this does not include the added interest costs accumulated for each month that you file late when you have amounts owing.

In addition to that, failing to file taxes impacts other aspects of your life too. If you need a loan from a financial institution, such as a mortgage or personal line of credit, the lender often uses your tax returns (amongst other documents) to make a credit decision. Without the tax return, you could be viewed unfavourably. Lastly, if you receive government benefits such as the Canada Child Benefit (CCB), your eligibility for these benefits is determined based on your tax return. As such, failing to file tax returns could delay the disbursement of these payments.

How to File Taxes

There are several ways to file your taxes – both independently as well as through a specialist. If you choose to do so independently, some of the online software you can use include:

  • Simpletax.ca
  • UFile.ca
  • Fastneasytax.com
  • And many others

Before you choose an online provider, though, make sure that they are certified by the Canada Revenue Agency. Around tax season, in particular, you will notice many potential scam sites run by people looking to deceive taxpayers. Take the time to explore a site and validate its credentials before you file your returns.

Tax-Saving Tips for Individuals

Let’s face it; no one enjoys paying taxes. However, as we have discussed previously, not paying your taxes on time can incur significant penalties, and not paying taxes at all is a criminal offense. The only way to legally reduce your tax bill is by reducing your taxable income (i.e., the amount of money that you report to the CRA that is then used to determine how much you owe or are owed in taxes). The taxable income is essentially all of your gross income, less income adjustments that you make.

So what are some of these adjustments that you can make to reduce taxes paid?

RRSP Contributions

Borrow Invest

The Canadian government has various incentives for people looking to save up for retirement. One of the most significant incentives is the Registered Retirement Savings Plan (RRSP). The RRSP is a “tax-advantaged” account which means that any withdrawals made into the RRSP are exempt from taxable income calculations in the year that the contribution is made. It is only taxed years later when the amount is withdrawn. In addition, any gains earned inside the RRSP are non-taxable.

Note, however, that citizens cannot continue socking money away into RRSPs without limits. The government only allows a maximum contribution each year. This maximum amount is located on your previous year’s Notice of Assessment. It is important to not over-contribute beyond this maximum amount as that accrues a 1% penalty for each month that the RRSP is over the limit.

RRSP Home Buyers’ Plan

The RRSP Home Buyers’ Plan enables first-time homebuyers to access up to $35,000 from their RRSP accounts tax-free to make a down payment on their home. Both spouses can tap into this $35,000 limit for a total of $70,000. However, both spouses have to be first-time home buyers. Another caveat is that the funds must be in the account for a minimum of 90 days before withdrawal. Lastly, it is essential to remember that this Home Buyers Plan is technically considered a loan. Hence, after two years of purchasing the home, the loan must be repaid to the RRSP through annual payments made over 15 years.

Borrow to Invest

A further option to boost returns while reducing taxes paid is the concept of borrowing capital to invest in securities such as equities or bonds. Over time, the value of these securities is likely to grow, meaning that you have made more returns with the added capital than you could have on just your equity. Additionally, from a tax savings standpoint, interest paid on borrowed money is tax-deductible.

Public transit

Canadian taxpayers can claim amounts paid for public transit passes such as buses, trains, ferries, and streetcars.

Tax-Saving Tips for Small Business Owners

Many individuals may also be self-employed and running a small business (1-50 employees). There are strategic ways these individuals can reduce their taxable income as well.

Account for All Receipts

As a small business owner, you often have so much going on that filing away your receipts accurately may seem like a low-priority item. However, this is a low-effort solution that can drastically help to reduce taxes at the end of the year. That lunch you had to wine and dine a client or that parking fee you paid to meet a client at their office are all deductible. Make sure you keep track of these receipts, as the CRA does not generally accept the credit card statement as proof of payment.

Know Your Deductions

Small businesses are entitled to several deductions, such as insurance costs, interest paid on business loans, office supplies, and even the gas and maintenance costs paid on company vehicles. Even the marketing costs paid to agencies or freelancers to promote your business are legitimate deductible expenses for your taxes. Understanding these deductible expenses can be crucial to maximizing tax returns at the end of the year.

Use an RRSP

Just like individuals, business owners also stand to gain from using an RRSP as a ‘shelter’ that helps to reduce taxable income.

CCA

The Capital Cost Allowance (CCA) is a stipulation on capital expenditures (i.e., purchases of assets that provide benefits for more than a year) that allows businesses to record depreciation amounts on these assets. For example, if you purchase a capital item for $10,000 in the current year, a portion of that $10,000 can be claimed, with the rest claimed in future years. The amount claimed is called the Capital Cost Allowance. Before you claim the CCA amount, though, make sure you read the CRA’s guidelines. Assets are classified into different categories with varying levels of maximum CCA allowances.

Credit Tips!

When in doubt, use an accountant. A qualified accountant offers the dual benefits of identifying additional deductions that you may have missed and ensuring that you are not committing any infractions of the tax law. Tax-related penalties can be severe, so paying an accountant can often be the cheaper option in the long term.

Depending on your circumstances, you may want to consider incorporating your business as a small business owner, as incorporated companies pay a lower tax rate. However, there are other expenses and risks to bear in mind as an incorporated business, so only do so once you have done a cost-benefit analysis with a trusted financial advisor.

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