It’s tax season once again, here in Canada, it is a common knowledge that the wages that you earned in a year will be taxed by Canada revenue Agency (CRA). And I will be honest to say that I am thankful that we only have to file taxes once a year (personally speaking). I am really bad with numbers, I cannot stand the confusing terms and mind-numbing computation that you need to face when preparing a tax return. I am not the right person to ask about this topic, but tax system is one of the important things that a resident of Canada should know, as I said, this is not my expertise but I used 3 important points in trying to understand Canadian taxation system.
How the Canadian taxation system works?
The Canadian tax system has three kinds of taxes collected by three levels of government – federal, provincial/territorial, and municipal taxes, The system is based on self- assessment concept, wherein every Canadian taxpayer is responsible for making sure that they comply with the tax rules of each level of government, taxpayer must ensure that they he paid the correct amount of taxes every year according to the law.
A person who is a resident of Canada must file a tax return for the previous year. A tax return is basically your report to the government of all of your income and some other financial details for a given year. A newcomer to Canada is also required to report his world income for the part of the year that he is a resident of Canada. Social Insurance Number (SIN) is an identification that a permanent resident (or someone working in Canada) must have, this unique and personal nine-digit number is required from an individual for him to work in Canada or to have access to government programs and benefits.
A taxpayer must pay the corresponding tax based on a number of factors such as
the province where the person lives, the amount of taxable income earned during the previous calendar year and the available tax deductions that the person is eligible to declare. Common types of taxable income are employment income, self-employment income, tips and gratuities, occasional earnings, investment income and universal child care benefit payments, while, tax deductions can include fitness and arts amounts for children, medical expenses, child care expenses, charitable donations, moving expenses etc.
CRA collects the tax on behalf of the federal government, provinces and territories, CRA has the authority to examine tax records to ensure that an individual (or business) has complied with the tax law, they use various review programs to make sure that people are following rules. A tax year ends on December 31st and tax return and any amount that you owe must be received by the CRA on or before April 30th of the following year while self-employed individuals can file their return o or before June 15th (but still need to pay their balance due on or before April 30th).
Why and how you file your tax returns?
A Canadian resident have to file his income tax return to pay the accurate amount of income tax owned, in return, he benefits from the programs and services provided by the government. Most benefits that Canadians enjoy are because of the taxes that they paid, Canada’s tax system pays for roads, education, health care, social security, economic development, cultural activities and public safety among other things.
Tax revenue is used to deliver benefits to lower income families, charities, students, retirees, and people with disabilities, it provides social benefits such as old age security, the Canada child tax benefit, employment insurance benefits, the working income tax benefit, the universal child care benefit, and the goods and services tax/harmonized sales tax credit.
There are a lot of situations in which people have to file a return, generally, an individual must file a return if he has an income and needs to pay tax for a particular calendar year. A person must file if the CRA sent him a request to do so. Individuals in all provinces and territories file a federal general income tax and benefit return, also called as T1 return. They also fill out the applicable provincial or territorial schedules for their province or territory of residence, with the exception of Quebec. T1 return is used to report income, claim deductions and credits and calculate tax obligations for the year. Quebec residents file a federal T1 return for the CRA and a separate provincial return for Revenu Québec.
A taxpayer must gather supporting information to fill out his return, including slips or receipts provided by an employer, payer or prepared by an administrator and various institutions such as:
- T4, Statement of Remuneration Paid;
- T4A, Statement of Pension, Retirement, Annuity, and Other Income;
- T4E, Statement of Employment Insurance and Other Benefits; and
- T5007, Statement of Benefits.
Because CRA calculates benefits and tax credits based on the taxpayer’s family situation, a taxpayer must declare his marital status and the name of his spouse or common law partner and his partner’s SIN and income. In order for CRA to calculate benefits, both the individual and his spouse or common-law partner must generally file an income tax and benefit return every year, even if neither of them have no income to report.
After gathering all the information slips from employers or payers, the taxpayer, must report all the amounts shown in box 14 of all his T4 slips to calculate his total income. Lottery winnings, GST/HST credit payments, Canada child tax benefit payments, and payments from related provincial and territorial programs should not be included as income. You also need to identify and claim your deductions in your T1 return, deductions are divided into two groups on your return: those that are deducted from your total income and those that are deducted from your net income. Some types of deductions from your total income include RRSP deductions, child care expenses, support payments you made, and union dues while the amounts that can be deducted from your net income include the Northern residents’ deductions and the capital gains deduction (More information regarding this information can be found in www.cra.gc.ca)
Once a taxpayer is ready to file his return, he has several ways to file it. CRA allows electronic filing options, such as EFILE and NETFILE and of course, there is always the paper filing method. EFILE allows filing service providers send individual T1 return information to the CRA over the Internet. Authorized service providers are primarily those who operate a tax preparation business. On the other hand, NETFILE allows most Canadians to file their personal income tax and benefit return using the Internet.
If a taxpayer wishes to use paper-filing method, he can use the General Income Tax and Benefit Guide to help him to follow steps in preparing his return. The taxpayer will need to transfer all data from his information slips to the schedules and return and calculate both federal and provincial taxes and how much he owes or expects to receive as a refund. The paper return can be mailed to the tax centre is noted on the back cover of the forms package (or you can visit CRA’s website to find where to send your T1 return).
If a taxpayer calculated that he has a balance owing, he must pay this owing so that you don’t get charged late-filing penalties and interest. However, if the taxpayer can’t pay his full balance owing, he can set up an arrangement by calling the TeleArrangment service at 1-866-256-1147 or the CRA at 1-888-863-8657.
Note that it is very important to keep and organized your tax documents, in general, it is advisable that a taxpayer must keep all his records and supporting documents. If this necessary information are not kept and a taxpayer is unable to provide proof to CRA in case CRA reviews the taxpayer’s return, the CRA may have to determine his income using other methods. The CRA may also disallow expenses that were deducted and credit the claimed, should these deductions were not supported.
What are the existing tools that can be used to pay less tax?
While a taxpayer’s return may show that he needs to pay more tax, there are deductions that may be available for him or he may be able to claim some non-refundable tax credits, and reduce his federal tax. I am always mixed up with these 2 terms – tax deductions and tax credits. Though both of them serve the same purpose (reduce tax burden) they work in different ways. Tax deductions work by lowering taxable income while tax credits are direct reduction on the tax due.
You may refer to CRA’s webpage for list and full details of various tax deductions and credits that is available in your province which may be applicable for you and your family but here are some of the most common deductions and tax credits for Canadian taxpayers:
Equivalent-to-spouse-tax-credit: Taxpayers, who are single, divorced or separated with children, can claim the “amount for an eligible dependent” (equivalent to spouse) tax credit for a dependent child, or other dependent relatives. If claiming a child, the dependent has to be a Canadian, resident, under 18, and financially dependent on the taxpayer.
Medical expenses tax credit: This credit applies to individuals who have significant medical expenses for themselves or their dependents. The medical expenses used in calculating a medical expense tax credit for a particular taxation year must have been paid within any 12-month period ending in the calendar year, unless the individual died in the year (medical expenses must have been paid within any 24-month period that includes the date of death) and the amount being claimed must be supported by receipts.
First-time homebuyers’ tax credit (HBTC): Beginning with the 2009 personal income tax return, the HBTC is a non-refundable tax credit, based on an amount of $5,000, for certain home buyers that acquire a qualifying home after January 27, 2009.
Children’s fitness tax credit: Since tax year 2007, the government allows a non-refundable tax credit on an amount up to $500 per year for the cost of registering a child who is under 18 years of age at the beginning of the year in eligible physical activity programs.
Children’s arts tax credit: Families can claim a non-refundable tax credit to a maximum of $500 per child for the cost of registering a child in eligible artistic, cultural, recreational or other developmental programs.
Education expenses tax credit: A taxpayer can claim tuition fees for an education tax credit, a tax certificate issued by an educational institution with the total eligible fees paid for the tax year which amount is over $100 may be used for this purpose. Examination fees paid to an educational institution, professional association, provincial ministry or other similar institution, to take an occupational, trade or professional examination that is required to obtain a professional status recognized by federal or provincial statute, or to be licensed or certified as a tradesperson, to be allowed to practice the profession or trade in Canada, may be eligible for the tuition tax credit.
Public transit tax credit: Taxpayer can claim cost of monthly public transit passes or passes of longer duration such as an annual pass for travel within Canada on public transit for the year.
Charitable donations tax credits: A taxpayer who made a gift of money or other property to certain institutions can claim eligible amounts of gifts to a limit of 75% of his net income. For gifts of certified cultural property or ecologically sensitive land, an amount of up to 100% of the taxpayer’s net income can be claimed. There are two charitable tax credit rates for both the federal government and the provinces and territories. The claim must have supporting documents or proof of payment such tax receipts, credit card slips, stubs or bank statements.
Carrying charges and interest expenses: A taxpayer can claim carrying charges and interest he paid to earn income from investments such as fees to manage or take care of your investments; fees for certain investment advice or for recording investment income; most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends and legal fees you incurred relating to support payments that your current or former spouse or common-law partner, or the natural parent of your child
Childcare expenses deduction: Taxpayers can claim child care costs paid to daycare centres, day nursery schools, caregivers such as nannies, day camps, and overnight boarding schools to have someone to look after his or his spouse’s or common-law partner’s child or a child under 16 years so that the person could earn income from employment; carry on a business either alone or as an active partner; attend school under the conditions identified under Educational program; or carry on research or similar work, for which you or the other person received a grant. The age limit does not apply if the dependent child is mentally or physically infirm.
Registered Retirement savings Plan (RRSP) Contributions Deduction: Deductible RRSP contributions can be used to reduce your tax. Generally, any income earned in the RRSP is tax-exempt as long as the funds remain in the plan, however, tax needs to be paid when payments are received from these plans. A taxpayer’s RRSP deduction limit can be found on the latest notice of assessment sent by the Canada Revenue Agency.
References & Resources:
Income Taxes in Canada, retrieved February 12, 2016.
Canada Revenue Agency: Learning about taxes, retrieved February 12, 2016.
Canada Revenue Agency: Series: Newcomers to Canada and the Canadian Tax System, retrieved February 12, 2016.
Canada Revenue Agency: What you can deduct, retrieved February 12, 2016.
Canada Revenue Agency: Line 323 – Your tuition, education, and textbook amounts, retrieved February 12, 2016.