Another Tax Season: Tips to Help You Survive
Updated: Jan 6
As we start 2022 there are a lot of discussions about "can you believe that we are 2 years into the pandemic?" and debates about "will this ever end?" or "why is our governments trying to control us?". Regardless of your perspective on vaccinations, lockdowns, protests and other things happening in the COVID world we live in, there is one truth that remains: Income taxes are not going away and it is time to plan for 2022!
Benjamin Franklin taught us: in this world nothing can be said to be certain, except death and taxes. I would add that even if you die, the tax collector comes one more time. There is no escaping it. There may be some tax strategies you can use to defer taxes or maybe reduce them, but outright avoidance just doesn't work. Besides being completely criminal in your activity (and even Al Capone failed on that front), you are going to pay your taxes. And, if you do not do it at the time and schedule that our Federal Government (our good friends at the Canada Revenue Agency) create for us, you will pay EXTRA in penalties and interest that just make the experience that much more unenjoyable.
None of that was a tip though. And you are presumably reading this looking for some tips. Here are some things that I have worked with clients to do so that the stress of filing taxes can be reduced. And, like everything in this world, there are no "cookie cutter" or "one solution fits all" pieces of advice. So, some of these will work for you. Some will not.
TIP 1: Accept that you will pay some tax. Whether your employer is taking it off your pay cheque or your accountant is adding up your business income and helping you figure out how much you may owe, the system will result in some tax being owed. The question is: How will you feel better about it when you file your tax return?
If you "like refunds": You need to be willing to have paid more tax in advance than was needed. You do not get a refund if you did not first pay the government something. Whether this is taking extra off your pay cheque, making voluntary instalments, big RSP contributions or finding some deductions the truth is: they only send back what you overpaid.
If you do not "want to give them a penny more than is needed before it is due": You need to watch for all of your instalment requirements and really paying attention to the income that is outside of a pay cheque. You may owe a small amount or nothing at all if you put all the "facts" in your tax preparer's hands for what is going to happen this year. There are some good websites that also help you predict what the total tax bill will be so that you can plan your instalments accordingly.
TIP 2: File. Even if you do not like the result or are scared of the result. The penalty for not filing is just you giving money away. It is far more stressful to accumulate a few years of unfiled taxes, then to bite the bullet and file each year, on time. If it turns out that you have a large balance that you do need to pay, there are a couple of things that may help you:
You can call the CRA and negotiate a payment plan based on what you can afford. You will still pay interest, but the CRA will not put you in collections as long as you are doing the minimum of what your agreement says you will do. For example, if you say you will pay $100 per month - pay it. If you can afford more, great that will reduce interest and get you out of debt faster. (CRA interest is high, so if you have a personal line of credit, compare the rates to see which place it is smarter for you to hold this balance.)
TIP 3: Recognize that by the time you are gathering everything for your tax preparer it is too late to change the result. A good tax preparer may be able to educate you on some deductions you did not know you had available, but that does not change that you still need to qualify. You need the right documentation (receipts, employer T2200, disability credit approval as just some examples) to have an appropriate filing position. So, when you are preparing for last year's taxes, make plans with your tax preparer to discuss how to manage this year's taxes. Tax planning is the only real way to save taxes. Not tax reacting.
TIP 4: Make sure that enough is being taken at source. And for those of you in tip 1 who like refunds, you can voluntarily request your employer to take a little bit more. For those of you who are employed, before payroll can start your new employer will ask you to complete the TD1 form. Filling this out correctly is key to ensuring that enough tax is taken off. And if you read the form, there are specific things you need to do if you have more than 1 job and/or just need more tax taken off. The point to remember is that the smaller the number is at the bottom of the form (and you will have a Federal and Provincial form) the more tax that will be taken off your pay cheque. If you are self-employed, know yourself. Set aside the funds that you forecast that you will owe. If you are not the type of person who will leave that money alone, then just send it to the CRA as an instalment. Do what will work best for you to ensure that you have the money on April 30 when the final payment is due.
TIP 5: Remember that help may be what you need. The one real advantage of someone who will prepare your taxes for you is: that person does a lot of tax returns. So, everything that is new to you, is not new to your tax preparer. You may be filing your first return as a married person, but your tax preparer has probably filed hundreds of returns for married people. You may be making your first medical claim, but your tax preparer is not. As I said before, by the time you bring everything to your tax preparer, the result is already set. But, at least you can leave it with someone who does not find this stressful. Someone who probably likes finding something for you that you did not know was there. Someone who is so efficient at this, that it will take them several minutes versus your several hours.
Tax preparation is stressful to many Canadians. The real way we avoid that stress is by being prepared and accepting that it is going to happen. The Canadian Income Tax system will ask Canadians to pay taxes on their income. There is no avoiding it. The best defense is to educate yourself on the areas available for you to save some tax money. These strategies need to be planned before you show up at your tax preparer's door (or in their electronic drop box for forms) to give you the best chance of finding the deductions and possibly credits that will work for you. There is not magic strategy.
Many of the strategies people will use may make sense independent of the tax advantages.
If you want to donate to a charity, you should do so in order to help advance the purpose of that charity. But, if you do give...keep the receipt. It will get you a small tax advantage.
If you want to save for your retirement, an RSP may be a good option. But, if you do, make sure you understand if you gave that contribution with pre-tax (off your pay cheque) or after-tax (from your bank account) will help you predict if a refund is coming.
If you need to work from home as a result of the pandemic, then you need to work from home. But, if you do, make sure you understand if you need an T2200 from your employer or if the simple method is best. And please make sure you know how long you worked from home.
Good luck in this upcoming tax season. Remember (with the possible exception of RSP contributions still to be made) the 2021 result is set. Put that year behind you and start planning for 2022 to make next year that much less stressful.