Why Do I Owe !!
Every year, a few unsuspecting clients leave disappointed because they ended up with a balance owing instead of getting a refund. There are some revenues that are taxable but are not taxed when you receive them, or they are taxed at a different rate but when you combine them with your other income, the result is that your income bracket forces you to pay the difference. Every Canadian is exempt from paying taxes on the first $14,398.00 they earn which is why these shortfalls occur if you do not advise your revenue sources that you have other income and wish to have extra taxes withheld. The revenue sources below are guided by deduction tables that mandate them to withhold less taxes or none at all, because they are not aware that you have other income.
RRSP withdrawals: When you contribute to an RRSP, your refund increases by an average of $250 for every $1000 you contribute. However, when you withdraw, the bank only withholds $100 for every $1000 you withdraw. The result is that for every $1,000 you withdraw, you will owe $150 in taxes. Depending on the situation, ask the bank to withhold at least 25% for taxes and if you aren’t sure, contact me for an analysis (this is a free service).
Employment Insurance: Employment Insurance is not taxed at the source (and if it is, it is taxed at below 10%). This means that when you work half a year and receive EI the other half, you will be left short. The result is that for every $1,000 you received in EI, you may owe as much as $250 in taxes. To circumvent this shortfall, have your employer take extra taxes off while you are working or talk to your EI worker about having additional taxes taken off at the source.
CPP/OLD AGE SECURITY BENEFITS: These Benefits are not taxed unless you make arrangement with Service Canada ahead of time. The result is that for every $1,000 you receive in benefits, you may owe as much as $250 in taxes. Call Service Canada and ask them to withhold taxes at the source (the biggest myth is that Death & Survivor Benefits are tax free – they are not!). Contact me for an analysis if you aren’t sure (this is a free service).
Part-Time Employment: Part-time employees are taxed very little if at all which is fine if you only have one part-time employment because it is based on the $14,398.00 exemption. The taxes you pay on the full time job already include the $13,808 exemption so when you also work a part-time job, this means that between the two – you have not paid taxes on $27,616. But your exemption is still only $14,398.00. This is why people who work a full-time and a part-time or two part-time jobs end up with a balance owing. If you decide to take on more than one job, please contact me for a free analysis.
It’s in YOUR “interest”
Did you know that a couple can save a significant amount of payable income tax simply by having all saving & chequing accounts, GICs, bonds or any and all interest bearing investments in both their names?
Its true! When both names appear on a T5, spouses can share the interest revenue 50/50 no matter whose SIN is on the T5. This means that the interest can be shared in percentages to maximize each return.
If you are able, it is in your best interest to open interest-bearing accounts or make investments jointly with your spouse or partner.
The Truth about withdrawing RRSPs from your plan
So you need a bit of extra money and decide to withdraw from your RRSP plan. When you withdraw, the bank holds back a certain amount for income taxes. You don’t think about it again until your tax prepared tells you that you OWE taxes this year.
“If the bank’ withheld income tax, then why do you owe?”
The answer is simple, the bank does not withhold enough to cover the amount of taxes owed on the withdrawal. Banks withhold 10% (ie if you withdraw $1,000, you will get $900 and the bank will keep $100 for taxes).
When you contribute to your RRSP plan, you save anywhere from $175 to $450 in taxes for every $1,000 you contribute. When you withdraw from your RRSP Plan, you pay $100 in taxes for every $1,000 you withdraw. There is a 20-35% difference NOT IN YOUR FAVOUR!
The reason the bank withholds only 10% (instead of the 30% you will actually owe) is that RRSPs are meant to be withdrawn when you are retired and no longer earn an income, which puts you in a lower tax bracket. Ten Percent might be enough when you are 60 and retired, but it isn’t enough when you are 32 and are earning full wages.
To ensure that you are not surprised at tax time, you can call me and I can do a tax scenario for you. You can also ask the bank to withhold more for income taxes as well – more like 20% or 25%.
BUYING SHARES/STOCKS – Know what you are getting into!
So Peter got a hot stock tip and on January 12 2019, he bought 2,000 shares at 50 cents each for a grand total of $1000 (plus a $25 trading fee) of a new Internet Company called “Girls-a-Go-Go.com”. He is going to be rich! Or not….Two things can happen:
Girls-a-Go-Go.com is a huge success and on January 12, 2021, Peter sells the stock, now worth $50.00 a share for a whopping $100,000 (minus a $25 trading fee) and throws a big party and laughs at all his friends who wouldn’t listen to him when he told them to invest! Or (the most likely scenario….), Girls-a-Go-Go.com is a huge bust and on January 12, 2017, Peter sells the stock, now worth 1 cent each for a whopping $20.00 (minus a $25 trading fee) and his friends take pity on him and take him out for coffee and laugh at him because he wouldn’t listen to them when they told him not to buy the stock!
If you plan on buying shares, you must keep in mind that immaculate records and tracking must be kept for Income Tax Purposes. Any money made or lost by buying and selling shares, must be reported on tax returns in the year the money was made or lost. The money made or lost on shares is called a “Capital Gain” or a “Capital Loss”, respectively.
The formula used for calculating your gain or loss is simple: Price of Shares Sold – Price of Shares Bought (minus any brokerage fees) x 50%
This means that in Peter’s get rich scenario, he will pay income tax on a capital gain of $49,487.50 ($100,000 – $1000 – $25 x 50% = $49,487.50). The $49,487.50 will appear on line 127 of his tax return and all calculations will be reported on Schedule 3.
In the story where Peter’s investment go bust, he will complete a Schedule 3 for his loss of $502.50 ($20 – $1000 – $25 x 50% = ($502.50) and Revenue Canada will file this amount for future use against a capital gain that Peter may have in the future – but it will not appear anywhere on Peter’s tax return as a deduction but will appear on his Notice of Assessment.
Every year on Peter’s Notice of Assessment, a paragraph will appear that will say “You have $502.50 in unused Capital Losses….”
If Peter never invests again, especially after THAT bad experience, he will eventually lose the Capital Loss.
Some of the more credible brokers will issue you monthly statements and a T5008 in late March for any shares sold or bought – however, this slip does not always contain enough information to complete Schedule 3 of a tax return.
It is imperative that you keep, for all sales and purchases of shares, whether through your bank, broker or by yourself online, a log of how many shares you bought or sold, what price you paid or sold them for, the dates of purchases and sales, and all fees paid for the said sale/purchase of shares.
Common-Law vs. Single
Every year, I get asked by individuals who are living common-law to file them as ‘single’ individuals and they ask me if they should be filing common-law. Unfortunately, I can’t make this decision for you but I must still advise you of possible consequences!
When a person is single and making under $40,000, they get HST and also get Ontario Trillium Benefits. When a couple has a household revenue of under $44,000, they also get the same benefits. This means that as ‘singles’, you can each earn $44,000 and get it all – but as soon as you file married or common-law you lose everything because you now have a combined household income of $88,000. It isn’t fair – but it’s the law and claiming otherwise is fraud.
“How can Revenue Canada know that us living together means that we are common-law or just roommates or good friends? Its none of their business…right?”
Wrong! With more and more ‘sharing of information’ between government departments, and public information such as ‘Facebook”, it takes one very small ‘flag’ to alert Revenue Canada that you are fraudulently filing your taxes as single when you are actually living common-law.
You might think that Revenue Canada has no way of knowing whether you are roommates, friends or living common-law, but consider the following tell-tale signs:
- your employer provides life insurance (you name your girl/boy friend as beneficiary and you declare the relation as “spouse”
- your employer provides dental/medical coverage (you list your girl/boy friend as your “spouse” to get them coverage too)
- you sign a lease, mortgage, loan application, car loan, credit card application (to bolster your income, you list your girl/boy friend’s income as well…as your “spouse”
- you have one or more children together and both your names on the birth certificate as parents and you reside at the same address
- you have an open profile on Facebook that states that you are married to your girl/boy friend
- more and more ‘snitch’ lines being set up by CRA to circumvent fraud (fight with a neighbor, friend or relative and they could easily turn you in!)
Consider that you and your common-law spouse have been living together for 5 years. If Revenue Canada were to find out that you had filed as single during this period, the money you would have to pay back, with penalties and interest, would be in the vicinity of $13,000…EACH!! Not to mention that you could face possible jail-time.
The definition provided in the Income Tax Act by Revenue Canada is as follow: This applies to a person of the opposite or same sex who is not your spouse, with whom you live and have a relationship and is either the natural or adoptive parent (legal or in fact) of your child OR has been living and having a relationship with you for at least 12 continuous months.
RECEIPTS – How Important are they?
Every year, I have clients who say “I don’t have a receipt, but I can get one”. I often wonder if individuals follow my advice when I tell them “You should really make it a point to get one”.
Here is Fred’s story – RENT RECEIPTS (TRUE story – named changed to protect the ‘victim’)
Fred received a letter from CRA in September 2019. They told him that they regularly re-assess individuals and would like to see his rent receipts from 2019 for the claim he made of $9,200 in rent.
Fred looks through his papers but realizes that he does not have the receipts. He has moved twice and the apartment building he lived in at that time has changed hands. Because it was almost 3 years ago, he can no longer get a receipt. He calls CRA and notifies them that he cannot get the receipts.
CRA mercilessly re-assesses him accordingly. The Ontario Tax Credit he received for his rent in 2019 was $908.00. Because he cannot substantiate his claim, he must now pay this back.
Here is Penny’s story – BABYSITTING (TRUE story – named changed to protect the ‘victim’)
Penny didn’t actually have a ‘sitter’, her Mom watched the kid’s for free. However, her best friend Tina said that Penny could use her daughter Melissa, who was 16 at the time on her 2020 tax return (this is an illegal practice by the way). Penny claimed $4,000 in child care expenses but never bothered getting an actual receipt because she just figured she would get it if she was ever asked for it.
In the Spring of 2021, Penny and Tina had a huge blow out with neither of them speaking for months. Tina moved to Toronto in August and Penny never heard from her again.
Penny received a letter from CRA in June 2021. They told her that they regularly re-assess individuals and would like to see the receipt for the $4,000 in child care expenses she claimed on her 2020 tax return.
Not only did Penny not have a receipt, she didn’t even know where Tina and Melissa had moved to…and even if she did, she couldn’t ask Tina for the receipt since they weren’t even on speaking terms! Penny had to tell CRA that she couldn’t ‘find’ the receipt.
CRA mercilessly re-assessed her accordingly. The $4,000 in child care expenses had lowered Penny’s taxes owing by $1,304. Because she could not substantiate her claim, she must now pay this back, plus $305 in penalties and $401 in interest. That’s $2011.
Always make sure you have actual receipts before making a claim on your tax return! Getting them only if you need them later is not a good idea!
Beware of tax shelter gifting arrangements
“If it sounds too good to be true, don’t fall for it”.
In support of the new Taxpayer Bill of Rights, Marie-Claude Bibeau, Minister of National Revenue, is urging Canadian taxpayers to be wary of promotions of tax shelter gifting arrangements promising huge tax savings. Many of these arrangements are currently being aggressively promoted. Taxpayers should be aware of the risks associated with participating in certain tax shelter gifting and donation arrangements, including gifting trust arrangements, leveraged cash donations, and buy-low, donate-high arrangements.
“If it sounds too good to be true, don’t fall for it. Taxpayers need to know that the Canada Revenue Agency (CRA) is auditing all tax shelter gifting arrangements,” said Minister Bibeau. “Under the new Taxpayer Bill of Rights, you can expect the CRA to provide information to help you recognize the types of tax schemes that are out there, and to warn you about the consequences of participating in risky investments.”
The minister noted that people should read the fine print even if a promoter states repeatedly that the tax scheme is acceptable. “Ask questions, and when in doubt, seek advice from an independent tax professional who is not associated with the scheme.”
The CRA reviews all tax shelter gifting arrangements to ensure that the tax benefits being claimed meet the requirements of the Income Tax Act. New schemes are being marketed that claim to be different from those for which the CRA has previously issued warnings. Taxpayers should avoid all schemes that promise donation receipts equal to 3 or 4 times the cash payment.
So far, the CRA has audited over 26,000 individuals who have participated in these tax shelters and as a result, about $1.4 billion in claimed donations have been denied. The CRA will soon complete audits of another 20,000 taxpayers, involving close to $550 million in donations, and is about to begin auditing another 50,000 taxpayers who have participated in tax shelter gifting arrangements. To protect Canadian taxpayers and maintain fairness in the tax system, CRA will audit every tax shelter gifting arrangement.
Maximizing your Tax Return
Every year, clients ask me for advice on how to get bigger tax refunds. Are there secrets? How can I get more? Are there loopholes?
Truth be told there are very few magic formulas or loopholes out there and the ones that exist, I apply to the full extent of the law. The only way to augment your tax return is to spend money (ie more charitable donations, more RRSP contributions, political party contributions, etc.). Many individuals who do get big refunds usually have unfortunate circumstances or have spent a bundle to earn it:
- single parents or parents with disabled children
- individuals with disabilities or medical bills in the thousands of dollars
- one spouse supports another stay-at-home spouse
- people that have extra taxes withheld to ‘save’
- parents who have children in college or university
- child care expenses with receipts (instead of paying ‘under the table’)
- employees who use their own cars or homes to earn their income etc.
AFTER DOING A LOT OF RESEARCH VIA THE INTERNET AND FINDING OUT WHAT OTHER TAX PREPARATION FIRMS recommend, I compiled the following list of what makes up the most ‘missed’ deductions because individuals don’t tell their tax preparers or do not realize that these can sometimes be tax write-offs:
- Did you make any payments to a union or professional organization?
- Did you make any payments for childcare or daycamp and you have receipts?
- Did you move and change employment or self-employment?
- Did you pay interest on a loan taken out for investment purposes?
- Did you pay for investment accounting fees?
- Did you use your vehicle to travel for your work (to and from work does not count)?
- Did you have an office at home that you use for your work more than 50% of the time?
- Did you pay legal fees to enforce payment of alimony or maintenance?
- Did you pay legal fees to enforce payment of wages?
- Did you receive an allowance from your employer for auto expenses?
- Are you single and did you support a dependent?
- Are you or your spouse/partner disabled?
- Are any of your dependents disabled?
- Did you pay interest on your OSAP student loan?
- Did you or your spouse/partner or dependents pay tuition fees?
- Did you have any medical expenses?
- Did you make payments to a health plan at work or privately? (payments for long and short term disability are excluded)
- Did you make any donations to a registered charity?
- Did you make any donations to a registered political party?
- Did you have any self-employment income?
- Did you pay for supplies used in your work?
- Were you paid in part by commissions?
If you answered YES to any of these, talk to me about it and maybe together, we can come up with ideas that would conclude in a better tax refund for you but please keep in mind that you must meet certain legal requirements for many of these tips.
