Money: A Canadian Tax Primer
Tax season, the period from mid February to April 30th, is rapidly approaching. It is marked by ads on TV for RRSP's; accountants stocking up on aspirin; and stacks of tax return guides and forms at your local post office.
Getting ready to prepare your tax return may be difficult, but it is very important. How much tax you will owe or be refunded will depend, in part, on your preparation. This article covers the highlights of preparation, for employees and self-employed individuals.
Employee tax returns are the most straightforward to prepare. You may have any of the following tax receipts, also called "T slips":
- the T4 "Statement of Remuneration Paid"
- the official tax receipt for any RRSP purchased
- the T4E "Statement of Employment Insurance Benefits"
- T4RSP "Statement of RRSP Income" for any RRSP cashed in
- the T3 "Statement of Trust Income Allocations and Designations" or a T5 "Statement of Investment Income" for any investment income
- form RC62 for Universal Child Care Benefits received
- other documents that may apply to your tax returns: medical expense receipts, transit metro-passes, charitable donations and childcare expense receipts.
Please note: this list is not all-inclusive.
The self-employed individual's situation is more complicated. In addition to the above, the self- employed individual must summarize revenue and expenses. This summary may be prepared using a spreadsheet or an accounting software package, or by letting an accountant figure it out. (This last option may be easiest, but it's also the most expensive.) Once the accountant has a summary of revenue and expenses, they can prepare the return.
As an individual's business grows, the accountant's role becomes more important. Formal Financial Statements will become necessary, especially if the business has incorporated, and when dealing with banks or large creditors. Accountants are a terrific source of advice and information for businesses. Certified Management Accountants (CMAs) are specifically trained to help companies improve profits, with topics including human resources, taxation, information technology, communications, and even accounting.
Preparing the Return
There are three ways to prepare your return: do it yourself, hire an accountant, or get a volunteer to do it. There are pros and cons to each method, as follows:
Preparing Your ReturnYourself
It cost you almost nothing, to prepare your own return, and you'll get detailed knowledge of every figure on the return. This is good to know if the Canada Revenue Agency (CRA) has any questions or decides to audit your tax return.
The Income Tax Act (ITA) is 2000+ pages long, not counting thousands more pages of updates and provincial tax laws. An accountant works with this information every day.
Having Your Return Prepared by an Accountant
Accountants (CMA's, CA's, CGA's) are trained in matters of taxation. It is our job to keep current with changes to the Income Tax Act. The software we use to prepare your tax return is more sophisticated than any you can buy yourself. If you are audited, we stand behind our work and will deal with CRA for you. Accountants look for ways to save you taxes that you may not have considered or even known about.
Accountants cost money. Years of training, sophisticated software and the usual overhead all have to be paid for. However, a client of mine once decided to prepare her own return to save money. Her calculations showed that she owed the government almost $2000. Frustrated, she called me. I prepared her return and got her a refund close to $5000. My bill was much less than the $7000 she would have cost herself, had she submitted her own tax return
Having Your Return Prepared by a Volunteer
The CRA runs a free volunteer-based tax preparation program: http://www.cra-arc.gc.ca/tx/ndvdls/vlntr/nd-eng.html. The volunteers receive support and training directly from CRA. Volunteer tax preparation clinics are available across the country, some year-round.
The volunteer program can't prepare all returns. Individuals with incomes over $25,000, couples over $30,000, and single parents over $35,000 are generally not eligible. Returns that are considered complex (i.e. deceased taxpayer, bankruptcy, self-employed, capital gains, rental property etc.) will not be prepared by the volunteer program. If there are problems with your return after it has been filed, you are on your own.
Notice of Assessment
Your tax return has been sent to the CRA. What next? The CRA assesses your tax return. In 2 to 8 weeks you will receive your Notice of Assessment. If everything went as planned, it will agree with the information on your tax return. But take time to look at the information on this notice. In addition to an income summary there will be, as applicable, information about RRSP contribution room, the Home Buyers Plan (HBP), Lifelong Learning Plan (LLP) and commentary about previous capital or non-capital losses, along with other relevant tax information from your file.
Conclusion If you notice a slight bias towards an accountant preparing your tax return in this article, you are right. After all, it is written by an accountant. However, I encourage everyone to try preparing their own tax return at least once. It will help you understand some of the process; and given the large chunk of cash we must give the government every year, that's important.
Disclaimer The Income Tax Act and other related legislation are large and complex laws that frustrate even the professionals at times. This article is intended to increase your awareness of issues that affect you and encourage you to look more closely at the ones that relate directly to your situation. You are encouraged to seek professional guidance specific to your unique situation.