Plan for Tax Season the Smart Way
Now is the time to plan for tax season, even though the holidays just came to an end. Jeff and Ben provide some useful tips to get prepared.
Ben: Okay, hello and welcome to another Consolidated Credit webinar. Today, we’ll be looking at coming up with a plan for tax season. One that you can stick with and hopefully, one that will help maximize your return or save money on the taxes that you may owe. So, today we’re joined with our executive director, Jeffery Schwartz, who’s going to lend us his expertise again. So, thanks, Jeff, for joining us. Let’s get started.
Jeff: Pleasure to be here Ben. Thanks for having me. This is an area of hidden treasure for many Canadians and I’m thrilled that we are talking about this today
Jeff: Now, a lot of people would joke around and say that paying taxes is a punishment for earning good money, and well, anyone who receives a substantial tax bill every year will attest. It may feel like that, but when we look at where our tax money goes, you can see that there are some pretty important things in there and that wouldn’t be possible without the income tax laws that we have here in Canada, and so here are some quick fun facts on our tax system. Taxes are a means to support social services, infrastructure, health care, and education, and without that support, we as individuals would be paying big-time. As well, here’s another fun fact; progressive taxes are progressive for higher earners. So, marginal rates are based on income. Now, if you’re a higher earner, ouch, but the reality is, this goes to show you that everyone has to pay their fair share. So, where do we start? Well, the best place to start is with the income tax and benefit return form. You also need to gather some other relevant tax forms like your T4s and T5s on the investment side, but we’ll get more into the specific specifics of what those are, later in the presentation. So, you’ll get these forms. You’ll fill them out with all the necessary information and then, you’ll send them off to the CRA. Filing taxes can be done in a few different ways, so again, we’ll be sure to take some time to go over what the best way to file is, given your current situation.
Ben: That’s right, Jeff. Essentially, you’re gonna gather these forms and fill them out yourself, or with the help of a professional, and once they’ve been received and assessed by the CRA, you can either expect a tax refund or a tax bill, based on your previous year’s income. Now, most personal tax returns are due by April 30th but that doesn’t mean you should wait until the last minute. You don’t want to get hit with any unnecessary penalties or interest, just because you filed late.
Jeff: Thank you, Ben, and go ahead.
Ben: Yeah, I was just gonna say, now we’re gonna talk about those people at the CRA. It’s three letters that can often give people quite a bit of a shock.
Jeff: That’s for sure. So, who are these people and what are they doing with our tax returns? Well, the CRA is responsible for reviewing the tax returns and selecting ones that will need a review or, worst case, the dreaded audit but there’s more to the CRA than just that. They’ll also promote and highlight the various tax benefits and deductions that are available, and recently, they’ve started training community organizations to help low-income tax filers get their taxes done for free while maximizing the refund that they get for that year.
Ben: So, it sounds like it’s not all doom and gloom with the CRA and many people’s knee-jerk reaction to those three letters aren’t always warranted. You know, there’s a ton of great information, tools, videos, resources, all on the CRA website. So, we’ll refer to that quite regularly throughout this workshop. Chances are, you can probably get the answers to your burning tax question there, right from the source at the CRA website that you see on the screen there. So, how about ways to file? Well, we’ve already mentioned some ways to file taxes in passing. So, here are the ways that Canadians can choose to file their taxes. The quickest and most popular mode by far, is doing them or having your tax accountant file or do them online. There’s a list of approved tax filing software available on that handy CRA website. So, it’s worth it to take a look if you want to take a crack at filing yourself and as someone who does it themselves every year, it’s really a straightforward process as long as your tax situation is a simple one, and as we might have mentioned, if there are some complexities in your tax situation, then you know hiring a CPA or a tax professional or a professional filing company can be worth every cent.
Jeff: Yeah, that’s right Ben. Certain individuals will want to avoid the headache of a tax audit and a pro can do exactly that for you. Now, if you’re not so technologically inclined, you can always file, you can always file offline. Many post offices will have a stack of income tax and benefit guides, and they’re available every February, and you can also request one to be mailed to you directly from the CRA. This guide is pretty lengthy and can be a little daunting but the reality is, it has all the forms and filing information you’ll need to get your taxes done on paper, and once completed, you just have to mail it back to the CRA for them to review.
Ben: Right. For anyone who does visit a post office, you’ll often see those big kind of green, thick guides off to the side and like said, they do have all that good information that you need in regards to filing offline.
Jeff: Yeah and filing yourself is a popular option, and that’s great for people who have simple tax files. Just gather the forms that you’ll need to file, but before you hop online and start punching numbers into their respective fields, take some time to learn about all the benefits and credits that are available to Canadians, to help keep their taxes low. This should form the crux of your annual tax plan.
Ben: Right, and if you happen to file or if you happen to have a phone, smart or otherwise, you know, there are some great tools that you can use as well. Filing over the phone is the least popular option but it is still available for Canadians wishing to do so, but it’s also worth noting that anyone with a smartphone will also have the ability to utilize CRA’s new mobile app, my CRA, and although you can’t file directly through the app as of now, you can use it to track the status of your tax return, any notices out there, audit information. That sort of stuff. So, check that out if you’re technologically astute and if you want to learn about the great tools and resources that are found there, you know, feel free to check that out.
Ben: And yeah. Next, we’ll talk about the CVITP clinics. There are a number of CVITP, which stands for “Community Volunteer Income Tax Program”, and they run clinics that are offered in close to whatever area you’re living in. Often in libraries or community centers. So, eligibility for these free tax clinics is based on your income and the family size. So, for instance, a family of four would be able to have their taxes filed at no charge, as long as their household income was less than $50,000. You can check out the CRA website for more information on clinic eligibility but there are thousands of organizations across Canada offering these programs and they’re growing every year. So, if you’re on a modest income and you have a simple tax situation, then definitely check out these community volunteer income tax clinics.
Jeff: Okay, now, you might want to flip to the next one, Ben.
Ben: We just covered these ones here.
Ben: Now, we’re going to talk about the CPAs.
Jeff: Yeah and what. You want to carry on there, Ben, and I’ll jump in a minute.
Ben: Yep, so although most of your burning tax questions can be answered through the CRA website like I mentioned, there’s always the option to file yourself or seek the help from the CVITP clinics, but there are some really great benefits to exploring what a tax professional or a chartered professional accountant can do for you and Jeff is gonna let us know exactly what they give you.
Jeff: Yeah and that’s really important. Tax pros are quite busy this time of year for a reason. They’re the professionals, so you can be assured that they know the tax laws but make sure you do your due diligence when looking for a tax accountant to help you with your tax return. They are not all created equal. Every tax company, every tax filing company or CPA will have their own strengths and weaknesses, so make sure you find a pro that matches what you’re looking for. What are their policies if you’re selected for an audit? Do they have experience working with people in a similar situation to you? Are you self-employed? All of these questions need to be answered before you hand them your tax file and their fees.
Ben: Right and that last point is an important one. Make sure you know how and what you’re being charged for. Services for these companies and CPAs differ far and right.
Jeff: Yeah, definitely. So, there are certainly many benefits to hiring a tax pro but you may be in a simple tax situation where filing yourself will be easy and straightforward enough, but if you’re self-employed, a contract worker, major losses in stock market, or perhaps you missed filing taxes for a few years, maybe even owe a substantial tax debt, then paying for the services of a professional is probably a worthwhile investment.
Ben: Right, now some of you are probably thinking wow. You know, that’s a lot of complex information. So, I thought it would be worthwhile just to come up with some sort of a simple step-by-step guide to filing taxes, and it goes a little something like this. So, you know, step one is obviously collect the information and your supporting documents. If you’re claiming any deductions or credits, make sure you have receipts, why you are claiming that, you know, that sort of thing. Next, you’re gonna have to select how you’re going to file. Like I mentioned earlier, filing online is the most popular and often the fastest way to return, to get your return or your bill. You can also do it over the phone or by mail but before you do that, you want to double-check and update all your personal information. You know, make sure the addresses are correct. Make sure your names are spelled correctly. All that information needs to be in there and it needs to be correct. Then, you’ll report your income. You can find that on your tax form. It’ll be there, what your taxable income is, so, you know, put that in the corresponding spot. Then, you want to make those claims. Any deductions, credits, benefits. You know, if you moved, I think it’s over forty kilometres for work, you can claim your moving expenses. If you’ve bought a new home. If there’s, you know, education or disability savings. All of those things can be included, so be sure to claim those as well. Once you’ve got that all packaged up, you’re going to send your return to Canada Revenue Agency, either online or by mail or through the phone, and once they receive it, they’re gonna check it, make sure everything’s right, and hopefully, you won’t be selected for a review or an audit, and that’s why you want to keep those supporting documents, seven, eight years maybe. They can audit you, you know, for years before, so you want to make sure that you keep all of the receipts and proof. Anything that’s going to support your claims. You want to hold on to that as well. So, we’ve been doing quite a bit of talking about deductions and credits, but there’s also been a significant amount of changes to Canadian tax laws recently. So, some of the newer credits that are available include the rental benefits. So, if you’re a renter, be sure to get a rent receipt from your landlord. You can also get a portion of your charitable donations deducted as well. So, be sure to get tax receipts for any registered charitable organizations that you’ve donated to in the previous year. Also, if you’re a first-time homebuyer, you’ll now be able to apply for a $5,000 credit if you’ve purchased a home in that year and unfortunately this year for students, they might find themselves with a little bit less of a refund than in previous years as they have done away with the tuition and textbook credit. However, interest paid on student loans can still be included in your tax file, so make sure you get the correct forms from your school’s financial aid office if that’s something you’re going to claim on your 2019 taxes and of course, no tax video would be complete without talking about RRSPs and TFSAs. So, Jeff’s gonna lead us off with RRSPs.
Jeff: Yeah, and thanks Ben. Other forms of tax sheltering that can lower any taxes owing include RRSPs (Registered Retirement Savings Plans) and TFSA’s (Tax-Free Savings Accounts), and there’s a lot of confusion out there about which one to do when, so it’s worth it for us to take some time on them, so you can best utilize them in your tax planning. So, by definition, our RRSPs are a tax-deferred investment vehicle. So, what does that mean? Well, it means you can use them to save money on taxes owing now, presumably while you’re working and in a higher marginal tax rate, by sheltering the income, your income, in an RRSP. Once you’ve retired, you’ll presumably be in a lower marginal tax rate and you can start to use that income that you’ve been sheltering in your RRSP for the last number of years. So, the idea there is that when you’re earning less, you’re gonna probably be in a lower tax rate and you’ll have more money in your pocket in retirement. So, you will be taxed on those withdrawals, but it will be at your current lower and hopefully lower marginal tax rate. You also have the option to turn that RRSP money into a regular income stream with a RIF or a LIF, often called a riff or a liff. Before you do that, you should always speak with a trusted financial adviser to get the whole picture before you start drawing down on your RRSP.
Ben: Right. That’s always a good idea. You want to make sure that you’re maximizing your tax return. So, what about TFSA’s? So, if it doesn’t sound like it makes sense for you to put money into an RRSP or a TFSA or you’re just confused, you know, don’t worry. There are many Canadians in that same boat. So, if Sheltering tax money because your income places you in a very high-income tax rate or a high bracket, and that isn’t the concern of you, then you might want to look at the advantages of a TFSA. A TFSA is a Tax-Free Investment Vehicle, and it’s different from the tax-deferred RRSP. It’s much easier to deposit and withdraw your funds from a TFSA and all the withdrawals are considered tax-free. Any investments that you do make within a TFSA are also going to grow tax-free, even after withdrawing the money. So, the limits allow you to also to carry over any unused contribution limit in the next year, adding to it the next year. So, there’s a bit of confusion on that, so Jeff’s gonna help us try and sort out what this contribution limit is all about.
Jeff: Okay, so before we get ahead of ourselves here, Ben, I think we should try to explain the contribution limits and carry over a little bit more. So, the contribution limit for 2019 is $6,000. So, let’s say at the end of 2019 you saved $3000 in your TFSA. When 2020 rolls around, you’ll now be able to deposit $9000 into your TFSA in 2020. Why? Well, in 2019 you had $3,000 of unused contribution room and that was carried forward and added to 2020’s contribution limit. Ben: Okay, so that makes a little more clearer. So, you’ve got $3,000 that you didn’t use in 2019 and they add that to your full $6,000 limit that you’ll get again in 2020, leaving you with $9000 available contribution room in 2020.
Jeff: Perfect, Ben, and again, any unused contribution room in 2020 will again be carried forward to 2021’s limit and so on, all the way to a maximum of $63,500 if you’ve been eligible for a TFSA since 2008, and to be eligible to open a TFSA, you need to have a valid social insurance number and be 18 years of age or older, and that’s it. Any bank or credit union will be happy to set up the TFSA for you. They don’t cost anything to set up and there’s no minimum contribution that needs to be made. It’s really a great option, and everyone should look into opening one if they haven’t done so already.
Ben: Right, so let’s try and put this simply. So, simply put, you need to know what you want to do with each of these savings vehicles. If you’re in a high-income situation and you’re getting a big tax bill each year, it might be worthwhile to speak to your financial adviser about maximizing the tax sheltering benefits of an RRSP. Now, if you’re in a lower tax bracket and sheltering tax money isn’t a concern of yours right now, then open a TFSA and start using it as soon as possible. It’s easy to deposit and withdraw your money, and it’s an even better place to stash some cash for emergency or maybe purpose-driven savings, like a new car or vacation or something like that, or it could just be a tax-free interest-earning investment vehicle. It’s a really, you know, open sort of place to store, save and use your money.
Jeff: So, the dreaded tax debt. So, first of all, owing a debt is never a fun experience, even more so when it’s tax debt, and like any debt, hiding from it is not going to make things better. In fact, it’s going to make things much more stressful and expensive. CRA debt carries interest with it. Mind you, it’s not as bad as credit card or line of credit interest rates but the CRA still charges a 5% interest rate on the total balance owing and an additional 1% for every month the debt goes unpaid. So, if you can’t pay or you know you can’t pay, you still need to file anyways. It will make things a lot easier for everyone involved.
Ben: You’re right Jeff. I hear that a lot. File anyway. Even if you know you’re going to be stuck with that big tax bill and you can’t pay by filing on time, you’re gonna avoid those late penalties, which can add up quickly and don’t forget that the CRA tax collectors have some pretty strong powers granted to them by the tax and excise act. You know, they’re not your typical harassing debt collectors. They actually have power to do a direct bank garnishment and take money right out of your personal bank account, and that’s a surprise no one wants to wake up to in the morning. So, if you owe a tax debt or any other kind of government debt, there are ways to get help.
Jeff: Yeah, and now, we’ve got to deal with it. In all my years of experience, my best piece, my biggest piece of advice and my best-used advice I would give anyone in any financial situation is don’t bury your head in the sand and hope it’ll go away. It won’t, but you can work with CRA right away to avoid any further penalties or fees. Explain your situation, what happened, why you can’t pay and if you have any sort of proof or documentation that supports your case, make sure the right people get copies of that information, and of course, the same goes for advice, goes for people who may be looking at bankruptcy as a solution. Don’t wait. I hear time and time again from people that went through a personal bankruptcy, “wow I should have done that a lot sooner.”. Whether it’s personal pride that’s on the line, a failed business, or worrying about what friends or family will think, there are a million reasons why people bury their heads in the sand when debt levels soar but this is the Canadian government we’re talking about. Your options are going to become more and more limited the longer you try and avoid dealing with your tax debt. So, yes, bankruptcy is 100 percent the last resort option and for that, you’ll do yourself a favor by speaking with a licensed insolvency trustee or a professional accountant that has experience with tax debt and working with the CRA. Well, more often than not, just taking some time to sit down and go over your monthly expenses and developing a spending plan could help avoid this problem altogether. So, if you’re like 57% of Canadians out there that have no monthly pen, you may want to speak to a financial counsellor to help you develop a workable monthly budget, set achievable financial goals, and clarify your situation so you can make the best financial decisions moving forward, and I should also mention that all of that is available at no cost. Yes, no cost. So, it’s worth every cent because the harsh reality is more than half of Canadians don’t budget and the situation is getting worse. Debt to income ratios are continuing to climb as do the average non-mortgage debt levels. Couple that with rising cost of living and you really have a perfect storm for financial crises.
Ben: Right, unfortunately, those are some pretty good points. Those are all contributing factors to the rise and insolvency that we see, and it’s the number one reason why so many Canadians are only two hundred dollars away from not being able to make ends meet every month but don’t worry. As we said earlier, you know, the news isn’t all doom and gloom. If there’s one fantastic statistic I’d like you to all take away from today’s video, it’s this. Yes, sadly it’s true that only 43% of Canadians have a monthly budget or spending plan, but of that 43%, 98% of them stick to the plan. So, what that statistic tells me is that if you can come up with some type of a monthly spending plan, be it a Fintech app, an old-school spreadsheet, or just a piece of paper stuck to the fridge for recording your daily spending, you’re pretty much guaranteed to stick with it so if you don’t know where to start with your monthly budget like Jeff said, give us a call. Speak to one of our counsellors. We’ll be happy to give you a free budget assessment and to help you develop a budget that you can actually stick with. So, that brings us to the end of our video. If you had any questions you’d like to direct it either myself or Jeff, please reach us at the email you see there, and for more great tax planning and budgeting tools, be sure to check out our resource center on the Consolidated Credit website and perhaps you just want to clear a picture like we mentioned. You know, what is your financial situation. If you want to see how much you’re spending, how much you’re saving every month, like I said, we’ve got counsellors standing by, ready to give you a free assessment. So, of course, I’d also like to thank our executive director Jeffery Schwartz for joining us today. So, thanks, Jeff. That was great
Jeff: Now and again, remember everybody, there is a treasure in those CRA forms and review what claims are available and use them. They are going to help you save some money. Have a great day!