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By Clayton Brown (Sponsor Content)
Are you leaving money on the table when it comes time to file your taxes? Lots of people do. They don’t bother applying for grants. They leave that ratty pile of expense receipts in the drawer (where they left it last year, too). And they don’t take full advantage of the deductions to which they are entitled.
Let’s get your taxes done right and get the biggest possible tax refund. Here are some tips about pitfalls to avoid, and easy things you can do to make that happen.
Tip 1. Don’t forget to deduct your deductions!
Remember, that tax refund you want isn’t a freebie from the government. It’s your money! They’re just holding it for you. So get it back, by claiming allowable deductions!
Hold on a second. What’s a deduction? It’s an amount you can deduct from your taxable income, thereby paying tax on a lower income.
We’ve noted a few common deductions here to save you some time.
RRSP contributions. You’ll need all of your RRSP slips … right? Actually, not so much! All you need is the dollar amount. Look at the transaction history for your RRSP contributions (which might just be a few lump sum contributions, or from an automatic savings plan) and add up all the contributions you’ve made. It’s a good idea to hang on to the receipts in case you’re audited but you don’t actually need them!
(You should have received them by now: see the timeline of forms below). Lower your taxable income by contributing to your retirement savings.)
Your annual contribution is limited to 18% of your previous tax year’s earned income, plus any unused carry forward room from previous years.
Child care costs. Did you pay someone else to look after your little ones while you went off to work or advanced your education?
The government lets you deduct up to $8,000 per child, for kids under 7. You can deduct up to $5,000 per child for those aged 7 to 16 (just guessing, but maybe there’s a government ratio in there that accounts for cuteness, which declines precipitously after age 6). For disabled or dependent children of any age, the maximum claim is $11,000.
Tip 2. Don’t forget to claim your credits!
A credit is an expense you can claim to reduce your taxes payable. It’s not the same as a deduction, which comes off the top of your income. But a credit is not a 1-to-1 deduction. A $500 credit is not the same as $500 off your tax bill. Check out this list of all available deductions and credits.
One example: interest paid on student loans. This is a pretty sweet deal. You can claim any interest on your student loans as a non-refundable credit. For student loans, the tax credit (federal and provincial) is calculated by multiplying the lowest federal/provincial/territorial tax rate by the amount of the loan interest.
Medical credits are another one that people forget about. You can apply credits to certain medical expenses. Charitable donations are also popular credits.
Credits can be non-refundable or refundable. A refundable tax credit means you’ll get the value for that credit, even if the tax bill is zero. But a non-refundable tax credit will only reduce your tax bill to zero.
Tip 3. Don’t file your taxes before you have all of the information you need
This is a super-common mistake. But filing too early could cost you extra time and money later, if you need to file all over again. Better to wait a bit and do it right the first time.
Get all the information you need. You don’t necessarily need the actual forms, if you have it from elsewhere. If you’re not sure if you have it all, best to wait.
Here’s what you should be getting that could help you file your taxes:
T4 Employment slip. February 2. Are you employed? Your employer should have delivered one of these by now.
T5. Return of Investment Income. February 2. A T5 is for interest directly paid from a bank, or dividends directly from a corporation. It’s not for income that comes from a trust.
T4RSP or T4RIF. Statement of RRSP Income or Statement of Income from an RRIF. Early March. If you withdrew funds from your RRSP, RRIF, LRIF or PRIF.
T4A – CRA. Statement of Pension, Retirement Annuity and other income. Early March. For income received from a Deferred Profit-Sharing Plan.
NR4. Statement of Amounts Paid or Credited to Non-Residents of Canada. Early March.Were you an expat in 2017? You’ll get this if you are a non-resident of Canada and made a withdrawal from an RRSP, RRIF, LRIF, PRIF, or RESP.
T5013. Statement of Partnership income. March 31. You’ll get this if you have investment income from partnerships.
T3 Statement of Trust Income Allocations and Designations. March 31. You’ll get this if you have investment income from mutual funds in non-registered accounts, or from certain trusts.
Tip 4. Don’t forget to carry forward your capital losses
You’re paying capital gains when your non-registered investments go up. But when they go down … you can still win (sort of)! At least you can mitigate the effect of the loss.
Your previous capital losses may be easy to miss if you don’t keep a record. Check your previous Notice of Assessment. You can also check the annual report from the investment broker.
You’ve got a capital loss when you’ve sold an investment for less than its adjusted cost base plus the outlays and expenses involved in selling that investment.
Basically, did you sell the investment at a loss compared to what you bought it for? Well, if you carry that forward, you can use these losses to offset your realized capital gains.
Tried to put the loss out of your mind? Well, just remember it at tax time.
Tip 5. Keep a record of everything for 6 years
This is a little less about maximizing your refund and more about minimizing the living hell of getting audited.
It’s not just something that happens to other people. And depending on your circumstances, you might be at a higher risk of an audit. There are plenty of exacerbating risk factors.
So … what should you keep for 6 years? If you’re self employed, you’ll need to keep receipts of expenses for which you’re claiming deductions (eg. entertainment, utilities: if you work from a home office, etc). Keep all those income slips mentioned above.
Ink wears out. Just look at receipts that are even a few months old and you’ll find they can become illegible. There are dozens of good apps these days for quickly scanning and organizing that paperwork, so make use of them.
Bonus Tip! File your taxes online
We recommend SimpleTax. It’s easy and fast to use. Of course, there are a few different tax filing software services you can use … feel free to research them on your own. This is just the one we’re familiar with, from personal experience.
There’s one critical reason why we recommend you use this kind of software, rather than huddling over a paper return like the cave men used to do when they would file taxes by Pterodactyl courier: you’ll make fewer mistakes. You’ll get prompts about which deductions you might be eligible for — and usually get some pretty useful, straightforward explanations for why they might work for you. Accuracy is important, and can make the difference between a good tax return and a great one.
Extra Bonus Tip! What to do if you get a tax refund
You could spend it. Most probably do, thinking this is an undeserved windfall. In truth, it’s your money. So investing it is a smart plan.
Clayton Brown is a Financial Adviser and Portfolio Manager at WealthBar. He has a passion for comprehensive financial planning and enjoys solving both simple and complex financial challenges for all Canadians. This blog originally appeared on the WealthBar site on March 5, 2019.
