June 15th Unincorporated Filing Deadline (Canada) is Fast Approaching, Plus Year-Round Tax Tips!

The chaos and stress that comes with tax filing season in Canada has ended for most of us unless you are operating a sole proprietorship or partnership because you have until June 15th, 2013 to file your income tax (T1) return.  Any amounts owing to the Canada Revenue Agency (CRA) were due to the CRA by April 30th, but you have the extra month-and-a-half to file the information return, so don’t be late.

In addition, June 15th falls on a Saturday this year, so the actual return is due in the hands of the CRA by midnight on Monday June 17th.  Mailing it on the 14th is not the best option, so if you are waiting until that weekend to complete the return, I strongly recommend that you walk it into the closest CRA Tax Services Office at get it stamped with the 17th on it, or courier it to a tax centre to ensure it arrives on the due date.

If in completing the return you now find out that you actually owe(d) the CRA money, you need to pay that amount in full.  If paying it in full is not an option, then send in the amount you can best afford, and contact the CRA to make a payment arrangement on the remainder.  If doing that is not an option or if you have been carrying a balance with the CRA and this return is going to add to that balance then you have a tax problem and you are likely going to need professional help to keep enforcement actions at bay.

The CRA charges interest daily, beginning the day after taxes were due and a late-filing penalty of 5% of your balance owing plus 1% of your balance owing for each month your tax return is late, for a maximum of 12 months.   Once you caught up in the web of CRA collections and enforcement it can be very difficult to get out.  The collectors are not going to advise you how to best handle your affairs.  For the most part, then don’t understand how businesses operate, let alone your business and all they want is full payment in order to close their file.

It is in your best interest to resolve these tax matters as soon as possible, before penalties are charged and interest accumulates.  Accepting these extra fees in hope that the Taxpayer Relief Program is going to grant you relief is not a wise bet to make.

At Intaxicating Tax Services, we have seen all types of tax problems over the 17-years we’ve been helping taxpayers resolve their tax issues with the Canada Revenue Agency.  As a former Collections officer, Enforcement officer, Complex Case Officer and Team Leader I have personally handled files with every level of complexity, and all revenue types, and have recommended the same course of action for all of them – Find someone trustworthy, who knows the way CRA collections operate and leverage that expertise to get out of this mess once and for all.

If negotiating a payment plan with the Canada Revenue Agency was easy and without risk, there would be no need for Collections staff at the CRA.  The truth is, it can be very difficult to work out a payment plan with the Canada Revenue Agency while making sure that you do not give them any collection sources that they do not already have, so they can secure their liability at your expense.

Don’t let them take advantage of your good will.

Intaxicating Tax Services can help you with this!

Here are some tax facts to keep in mind as your prepare you finances for the 2013 tax filing season.

13. Contrary to popular belief the top 10% of Canadian earners pay half of all personal income taxes, while the half of earners with the lowest income pay less than a tenth (1/10th) of the total.  These high income earners keep the economy moving by having money to spend and by actually spending it.  It is this reason why those in the highest tax brackets need (and can afford) to best lawyers, accountants and tax experts, as they are already well into planning for their tax returns for 2013 and beyond.  They DO have some choice as to how much they want to spend and how much they plan to save.  All Canadians have this choice too.  By spending less, we pay less consumption taxes (GST/HST/PST), if we downsize our homes or live outside of metropolitan areas we can reduce or pay less property taxes, if we walk, cycle or carpool more, we pay less gasoline taxes, and if we are more organized and smarter with how much money we spend in total, we pay less bank fees, late fees, interest on credit cards, etc.  Everyone, not matter their income has to be smart with their money.  Paying penalties and interest to the CRA is NOT a smart way to handle our money.

12. Regardless of where you are and what you do, you really should file a tax return.  Canadian reporting is voluntary in certain conditions, but be sure you are exempted before you pass on filing.  The CRA provides details as to when you need to file and why you should file right here.

11. You have the option to defer the paying of taxes, in some cases, when you save for retirement inside a RRSP / IRA or any other form of registered retirement savings plan.  In these plans, you defer payment of income taxes until later in life. There are taxes assessed when you withdraw the money, after you have reached a certain age but those tax rates are probably lower than you would be paying now, if you have above-average income.  If your income is below average, you may be better off to pay taxes now and save in a tax-free savings account (TFSA).  If you save for your family inside a registered education savings plan or a registered disability savings plan, there will be a deferral of taxes on interest earnings, other investment returns and government grants.  Then the child or other relative for whom the plan was set up for, will likely pay little or no taxes on those savings.

10. Before you file make sure you have all your slips – it’s best to have a place where they can go throughout the year, and periodically, you should take them out, write on them what they were for and keep them all together at time of filing.   Amending tax returns is a long, tedious process, plus having to search the house or business for these slips one day before filing deadline can be extremely stressful.

9.  Make sure the government has correct information for you – address, name, direct deposit (if you never owe money) because you want your refund and if they audit you, they might not be re-assessing you, but rather they may be looking for an additional copy of a receipt they lost in the processing of 20 million tax returns.   If they do not have a correct address and they need information or something gets lost along the way and a balance arises, they will take it from your bank account or freeze that account until they get all your information – but now you are in collections…

8.  Do not ignore government mail.  Open it and action it.

7.  File electronically – but keep your receipts handy for audit and verification purposes.  It is the quickest way to file, and you may even get your refund quicker.   As an added bonus, you are also being environmentally responsible and saving trees.

6.  If you owe money, make sure that you address it properly.  Do not write a note and attach it to your return – those notes get tossed during the mass-processing cycle – but instead, contact the government and make a payment arrangement and honor it.   Anything you attach to your return – even if it is written with a glitter pen (don’t laugh, I have received MANY letters written this way during my time at the CRA) comes into the processing centres, the processors, who are usually temporary hires to help the CRA get through the tax season, rip of cheques and process that right away, then tear off any unnecessary paperwork and send the returns to a data processing group.  Anything not a return or money gets shredded.

5.  Think before you complain.  Paying taxes means your earned more money than you had to pay out.  Good for you.  As well, a third of all income in Canada is paid in taxes, which may seem really high, but before you consider moving out of the country, consider that the Canadian tax burden is less than that of 19 other developed nations. We, as Canadians only pay more taxes than 10 developed nations.

4.  Ever wonder what the CRA does with the tax money they collect?  Well, the Minister of National Revenue uses 62% of it to pay for health care, education and social assistance, including unemployment benefits.  The other 38% goes for everything else we need, like infrastructure, social programs, etc.

3.  Not everything in Canada is taxed, and here are some prime examples; There is no tax on a winning Lottery tickets, on scholarships, inheritances, gifts, the Guaranteed Income Supplement (GIS) to the taxable Old Age Security (OAS) pension, Canada Child Tax Benefit cheques or child support payments after a divorce. You pay no tax on at least the first $9,000 of waged earnings or $40,000 of income per year if you receive only eligible corporate dividends and $18,000 if you receive only capital gains.

2.  On the flip side, there are some high-tax items, some you can make the choice to avoid, and one you might accept regardless of the amount of tax owing; The Federal income tax rate on income greater than $135,054 a year in 2012 is 29%, plus Provincial tax rates which bounce between 10%-21% based on the Province.  Taxes on cigarettes in Ontario was 63.5%; alcohol, 52.7%; and regular gasoline 39.47%.

1.  Tax relief opportunities are available, but you need to either research them or ask an expert how to qualify and what they are.  For example, there are tax breaks and benefits for those who better themselves, or the economy through getting a higher education, earning high grades, raising children, moving closer to a job, belonging to a professional group or organization, taking public transit, making charitable and political donations, investing in companies, starting a small business, and saving for retirement.   We all have the opportunity to save money, pay less tax and help ourselves and others in the future, but whatever you choose to do today, or tomorrow it’s never too late to make a change for the better.

Start today.  Stop paying the government late filing penalties, or penalties for missing installments.  Stop paying the government interest at 10% and don’t be afraid to open that brown envelope.  If you have a tax problem, we  can help.  We understand how these can spin out of control and we certainly do not judge.  With 17-years of actual tax expertise, 11 of them in the CRA, why would you trust anyone else?

Call today for a free consultation.

The Minister of National Revenue can have your tax dollars to run the country.  All Canadians thank you for that.

You don’t need to pay them penalties and interest.  You do not want to know that the CRA do with the penalties and interest money it collects!

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Get Ready for Filing Season… starting now!

taxes
Get ready for tax filing season… NOW

Now that the calendar has turned from 2012 to 2013, it’s time to get ready for filing your 2012 taxes.  There is no better time to start getting ready than today!  Below you will find some suggestions to help you get started with all of your End-of-Year reporting and tax requirements.

Right away, it never hurts to set up a meeting with your accountant early enough so they still have time to spend with you.  Your accountant will be able to asses your fiscal situation and advise you on things such as your retirement plan, charitable contributions and other deductions that might lower your tax bill, either for 2012 – like making RRSP contributions, or things you can arrange early in 2013 to get you up and running for the year.

Before you meet with your accountant, however, there are some things you should gather and have ready for the meeting:

  • Property tax bills for the year – especially if you use any of your home for business, then you’ll need to know the approximate square footage of your home and the room(s).
  • Letters and receipts relating to charitable donations made in 2012, which must include the monetary value of your gift to the organization, the date and year of the donation and that organizations charitable number (meaning they are legitimate).
  • Relevant reports from whichever of the online bookkeeping tools you are using to capture data.  Be sure the information is accurate and up-to-date.
  • If you hand-write your checks, make sure you have all your receipts and that they are detailed enough to categorize the expense.
  • Medical deductions for the year, if you qualify.
  • Retirement Account information – are they maxed out, have you stayed within the amount available?
  • Bonuses and Gift(s) information – Keeping in mind that employers tend to show their appreciation to their employees by issuing bonuses / giving gifts towards year-end and these are considered taxable benefits.
  • Insurance – Now is also the time to review all of your insurance policies. Life insurance, health insurance, even homeowner’s insurance need to reflect your life situation accurately. Major life changes like marriage, divorce or the arrival of a new baby (or 2) require changes in coverage.  A new job that requires you to travel for business means you have to change your car insurance policy.

Your accountant should also be able to help you keep track of what you received last year in the way of slips and returns and thus advise you what to expect this year and when it should come so that you don’t have to wait until the last-minute to file.

You should also get a box or magazine box and set it up in your office for all the tax information to reside in until you need it at year-end.  There is nothing worse than forgetting to gather something or losing a record at year-end.

End-of-Year preparations don’t have to be stressful and if you need a little more help, you could always hire a bookkeeper to reconcile your chequebook / online purchases with your bank statements among many other things which can simplify your life by keeping your data organized, which ultimately saves time for your accountant (and that saves you money!).

Happy filing!

Some basics of Canadian Investing; Mutual Funds, Eligible Dividends and Deferred Tax

Here is a brief introduction to the absolute basics of investing Canada. If you know this, you really just know the basics.  If you do not know much about Mutual funds, Eligible dividends, income trusts, and deferring taxes owing then trust me, this is the tip of the iceberg.  The Investment Fund Institute of Canada (IFIC) has a mutual fund course as probably does the Canadian Securities Institute (CSI).  Both are sought after for entry into the financial sector.

At the very basic, here are the 2 main types of tax-sheltered investments you probably have heard about – RRSP or RRIF.  In both cases, you put money away into these investments which are NOT taxed at year-end.  you pay taxes when you withdraw or remove the funds after certain milestones, such as age 65. 

Investments that generate capital gains or Canadian source dividends are taxed more favourable than interest income because interest income earned from investments such as T-Bills, bonds, and GIC’s are generally taxed at the highest marginal tax rate.
• Dividends earned from a Canadian Corporation are taxed at a lower rate than interest income.  This is because dividends are eligible for a dividend tax credit, which recognizes that the corporation has already paid tax on the income that is being distributed to shareholders.
o This only applies to dividends from a Canadian corporation.
o Dividends paid from a foreign corporation are not eligible for the dividend tax credit.

As of 2006 there are now two types of dividends, eligible and non-eligible dividends, and they are treated differently from a tax perspective.
• Eligible dividends include those received from a public Canadian corporation and certain private, resident corporations that must pay Canadian tax at the general corporation rate. As a result, they have a federal tax credit of 18.97% and are grossed up by 145%.
• Non-eligible dividends include those received from Canadian-controlled private corporations not subject to the general corporate tax rate.  They have federal tax credit of 13.33% and are grossed up by 125%.

This change was introduced by the government of Canada in order to present a more balanced tax treatment between corporations and income trusts as Canadians were investing more and more in income trusts and less and less in corporations and why wouldn’t they, since prior to 2006 income trusts were not taxed on any income allocated to unit holders, whereas dividends paid by a Canadian corporation are paid out of after tax earnings. 

To combat this, many corporations began to restructure their operations to become income trusts.  Something had to be done.

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes.  These deductions reduce the operating entity’s tax to nil.   

The trust “flows” all of its income received from the operating entity out to unitholders.  The distributions paid or payable to unitholders reduces a trust’s taxable income, so the net result is that a trust would also pay little to no income tax, which is never a good thing in the government’s eyes.

So who then gets hit with the tax bill??  The net effect is that the interest, royalty or lease payments are taxed at the unitholder level;
1. A flow-through entity whose income is redirected to unitholders, the trust structure avoids any possible double taxation that comes from combining corporate (T2) income taxation with shareholders’ dividend taxation
2. Where there is no double taxation, there can be the advantage of deferring the payment of tax.  When the distributions are received by a non-taxed entity, like a pension fund, all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
3. Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by tax treaties, that had not considered the forfeiture of tax at the corporate level.
4. The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates.  It’s easier to distribute all the funds out and show nothing being retained that it is to implement strategies to reduce corporate tax owing which is the path most often taken. 

Where can a holder find their dividends reports?  Dividends are usually shown on the following CRA slips:
• T5, Statement of Investment Income
• T4PS, Statement of Employees Profit Sharing Plan Allocations and Payments
• T3, Statement of Trust Income Allocations and Designations
• T5013, Statement of Partnership Income
• T5013A, Statement of Partnership Income for Tax Shelters and Renounced Resource Expenses

When completing a Canadian tax return, where should a holder enter their dividend information?

Enter on Line 180 the taxable amount of dividends (other than eligible dividends) as follows:
• box 11 on T5 slips
• box 25 on T4PS slips
• box 32 on T3 slips
• box 51-1 on your T5013 or T5013A slips.

Enter on Line 120 the taxable amount of all dividends from taxable Canadian corporations, as follows:
• boxes 11 and 25 on T5 slips
• boxes 25 and 31 on T4PS slips
• boxes 32 and 50 on T3 slips
• boxes 51-1 and 52-1 on your T5013 or T5013A slips.

What do I do if I did not receive an information slips?

Ignore it and the CRA will let me off the hook?  No chance.  If you did not receive an information slip, you must calculate the taxable amount of other than eligible dividends by multiplying the actual amount of dividends (other than eligible) you received by 125% and reporting the result on line 180.  You must also calculate the taxable amount of eligible dividends by multiplying the actual amount of eligible dividends you received by 141%. Report the combined total of eligible and other than eligible dividends on line 120.

So what exactly is a capital gain?

Capital gains occur when you sell an asset for more than you paid for it. This gain is offset by any losses and can be further reduced by any expenses that are incurred by the purchase or sale of the asset – resulting in net capital gain.
Taxation of capital gains: 50% of a net gain is taxable at the appropriate federal and provincial rates.

My accountant advised me I need more “Tax deferral”.  What does she mean?   She means contributing the maximum amount to your RRSP which provides an immediate tax deduction and tax sheltered growth as long as the investment(s) remain in the plan.

Other less commonly used strategies include:
• Universal Life Insurance is a policy that combines life insurance coverage with a tax deferred investment component. Premiums paid are first used to ensure life coverage and the balance accumulates in an investment account where it grows tax deferred.
• Registered Educations Savings Plan (RESP) is a plan where contributions are used to fund a child or grandchild’s post secondary education costs.
o initial contributions are not tax-deductible
o any income earned within the plan is only taxable in the hands of the student at the time of withdrawal.

More is coming in the next few days, weeks and months…

What tax slips / returns did I receive and why?

Have you ever received tax slips in the mail and wondered why?

Here are some of the slips you may have received and a description of what they are reporting:

 

RRSP Contribution Receipts

RRSP contribution receipts are issued for all contributions, regardless of the amount, and show all reportable contributions for the tax year.   These get mailed more frequently if you are actively contributing to your RRSP,  with the first mailing at the end of January (for contributions made between March 1st and December 31st), and in separate mailings until mid-March (for contributions made in the first 60 days of the following year, to be applied to the previous year. 

 

T4RSP/T4RIF Relevé 2 (RL2)

T4RSPs/T4RIFs are issued for all withdrawals, regardless of amount, and show actual or deemed withdrawals from an RRSP/RRIF, including Lifelong Learning Plan (LLP), Homebuyers Plan, marriage breakdown and hardship. Quebec residents must file the RL2, in addition to the T4RSP/T4RIF.   These slips are mailed by the last day in February, so you should be receiving them around then, early March at the latest. 

 

NR4

NR4s are only issued for amounts of at least $50 per currency for investment accounts, but for any amount for registered accounts. NR4s are also issued for amounts less than $50 per currency if tax was withheld from the payment. It records reportable income from Canadian sources for non-residents of Canada.  The NR4 is required to be mailed before the last day in March (or early April if March 31st falls on a Saturday or Sunday). 

 

T4A/Relevé 1 (RL1)

T4As are issued for all withdrawals, regardless of amount, and show actual or deemed withdrawals from an RESP. Quebec residents must file the RL1, in addition to the T4A.   T4A’s / RL1’s are required to be mailed by the last day in February. 

 

T5/Relevé 3 (RL-3)

T5’s report dividend and interest income and are only issued for amounts of at least $50 per currency. It consists of two parts: the T5 Supplementary (which shows the reportable regular and split share income for the tax year) and the Investment Income and Expense Summary (which provides details of the totals, including expense items). Quebec residents must file the provincial tax form, Relevé 3, in addition to the T5.   These are mailed out to holders before the last day in February.

 

T3/Relevé 16 (RL16)

T3’s report trust and mutual fund income and are only issued for amounts of at least $100. It consists of two parts: the T3 Supplementary (which shows the reportable capital gains and other income for the tax year) and Summary of Trust Income and Expense (which provides details of the totals, including expense items, as well as the adjusted cost base portion – return of capital). Quebec residents must file a RL16, in addition to the T3.  These are to be mailed before the last day in March. 

 

T5013/ Relevé 15 (RL15)

T5013s are issued for limited partnership income, regardless of the amount, and record the partnership’s gain or losses at the partnership’s year-end. Quebec residents must file the RL15, in addition to the T5013.   These are sent out before the end of March.

 

Relevé 7 (RL7)

RL7’s are issued for Quebec Residents only, recording all reportable income from the Small and Medium Enterprises Growth Stock Plan (SME), formerly called the Quebec Stock Savings Plan.  These are mailed before the last day of February. 

 

1099-DIV

1099-DIVs show all reportable dividends paid to a U.S. person (or individuals subject to US tax laws) during the tax year.   1099-DIV’s can be mailed out by the end of January, however, the IRS allows for companies to file for 30 day extensions, and most apply for it to be sure of no penalty or interest, so these forms are mailed by the end of February instead.  

 

1099-INT

1099-INTs show all reportable interest paid to a US person (or individuals subject to US tax laws) during the tax year. These are to be mailed by the end of January.

 

1099-B

1099-Bs show all reportable distributions for a US person (or individuals subject to US tax laws) during the tax year.  As mentioned with the 1099-DIV’s are subject to an extension and thus are usually mailed by the end of February instead of the end of January. 

 

1042-S

1042-S’s show all reportable US source income paid to a non-resident of the US during the tax year.  These forms are to be mailed by the end of March.