Expert tips for tackling your income taxes

It's that time of year when the nagging call of your receipt pile is either fuelling low-grade generalized dread or high-key refund fantasies. With Canada's 2019 tax deadline close on the horizon, we asked two personal finance experts to answer some common tax questions and share their tips for filing your return with minimal hassle or liability and maximum potential for refund.

What dates and timelines do you need to be aware of?

Lisa Zamparo, chartered professional accountant and founder of The Wellth Company: Most tax returns are due to be filed and paid by April 30th. If you're self-employed, you have until June 15th.

Jessica Moorhouse, millennial money expert and accredited financial counselor: If you owe taxes, you have to pay that before April 30th, so [you] might as well — unless you're okay paying interest! Typically, if you file on or before the due dates, you can expect your refund within two weeks if you file online or eight weeks if you file a paper return.

What happens if you don't file, file late or make a mistake?

Lisa: If you don't file or file late, you'll likely receive some letters from the CRA [Canada Revenue Agency] reminding you to file. These aren't friendly reminders, mind you. Many of my clients who receive them find them to be quite stressful! When you do file your returns, there will be a late filing penalty and interest. The longer you wait and the more money you owe, the bigger those extra fees.

Jessica: The CRA will charge you a penalty of five per cent of your 2018 balance owing, plus one per cent of your balance owing for each full month your return is late, to a maximum of 12 months. Moreover, if you paid a late-filing penalty for your 2015, 2016 or 2017 return, and then you're late to file your 2018 return, you may be charged a late-filing penalty of 10 per cent for your 2018 balance owing, plus two per cent of your 2018 balance owing for each full month your return is late, to a maximum of 20 months. With all that said, pay your taxes on time. Otherwise, you're just wasting money!

Lisa: If you make a mistake, you'll need to file a corrected — or amended — tax return [with your accountant or through your MyCRA account]. There won't be a late filing penalty since you filed on time, but there might be interest if you owe more than what you originally filed.

Sometimes, the CRA will catch mistakes that you didn't, for example, if you forget to include a T4 slip, or didn't claim a tuition credit when you could have. If that happens, they will automatically re-assess your return and send you a letter with the details of the changes they made and the impact on your balance owing or refund.

What are tax credits and deductions?

Jessica: Tax deductions are expenses that can be deducted from your gross income, such as union dues, RRSP [Registered Retirement Savings Plan] contributions, business expenses, et cetera. Once all of your deductions have been accounted for, you end up with your total net income, which is what you are taxed on.

Lisa: Deductions are worth more to you when you're in a higher tax bracket, so there can be a benefit to delaying taking a deduction into a future year when you're earning more.

Jessica: Tax credits are applied to the amount of taxes you owe. Refundable tax credits can reduce your taxes owed below zero, making you eligible for a tax refund. Non-refundable tax credits, which are more common, will reduce your taxes owed up until you hit zero. Once you don't owe any taxes, those credits cannot be used to get a refund.

What are some deductions and credits people often miss, and where can they find a comprehensive list?

Jessica: When you use online tax software or work with a professional, they can remind you of deductions and credits you may have not known about or forgotten. But it's always great to do your own research so you can save those important receipts throughout the year. Some common deductions people forget about include child care expenses and moving expenses.

Lisa: A lot of people miss out on medical expenses. You might also not be aware of what expenses are eligible — for example, if you have Celiac disease, you can claim the incremental cost of gluten-free foods. There's an extensive list of eligible medical expenses on the CRA website, and [a] list of all deductions and credits can be found there.

How else can people reduce their tax burden?

Lisa: RRSP contributions are a great way to both save for the future and reduce the taxes you pay today. However, this benefit is most impactful for individuals earning more than around $45,000–50,000 annually. If you're earning under this amount, there's a risk you might actually end up paying more tax — that is, if [you'll be] in a higher tax bracket in retirement. For individuals at this income level, I usually recommend prioritizing saving and investing through a Tax-Free Savings Account (TFSA).

Although the annual contribution limit for a TFSA is much lower ($5,500 in 2018 and $6,000 in 2019), and you don't get a deduction on your tax return when you contribute, your money will grow tax-free indefinitely — and, you can make withdrawals without a tax bill!

What are some popular tax-filing misconceptions?

Jessica: There are two misconceptions I keep seeing. [The] first [is] that you can file jointly in Canada — you can't. You can file a joint income tax return in the U.S., but you have to file individual returns in Canada. That being said, you can harmonize your taxes to reduce the amount of tax the higher-earning partner owes by using the same tax software and linking to your spouse, using the same tax accountant, or if using different tax accountant or softwares, making sure to take into account the different ways you can pool expenses and credits.

Another big misconception is that if you earn more, you pay more in taxes and thus have the same take-home income as someone who earns less in a lower tax bracket. Yes, if you earn more, your tax rate will increase, but you'll still have a higher after-tax income.

Just check out these scenarios [for Ontario residents that I calculated] using [the] SimpleTax calculator:

Employment income: $30,000

Average tax rate: 17.63%

Income after paying tax, and CPP and EI premiums: $24,712    

Employment income: $60,000

Average tax rate: 23.92%

Income after paying tax, and CPP and EI premiums: $45,648     

Employment income: $100,000

Average tax rate: 27.86%

Income after paying tax, and CPP and EI premiums: $72,140   

Employment income: $150,000

Average tax rate: 33.15%

Income after paying tax, and CPP and EI premiums: $100,270

Employment income: $300,000

Average tax rate: 42.28%

Income after paying tax, and CPP and EI premiums: $173,151

Should you treat taxes differently at different stages of life?

Lisa: Most of us are looking to optimize the amount of taxes we pay, but how we go about that is different depending on our age and life circumstances. Students and new grads can take advantage of tuition credits. Those in the peak of their career will focus on RRSP contributions. And those [who are] approaching or in retirement can consider delaying their CPP [Canada Pension Plan] and OAS [Old Age Security] benefits to maximize the annual payout.

What should you do with your refund, if you get one?

Jessica: Pay down debt, put it in your emergency fund or invest it.

Are there any situations in which you have to have an accountant?

Lisa: I usually recommend that you hire an accountant if you feel uncomfortable or stressed out about doing your taxes. Having the guidance of a professional can ease those anxieties, and you can learn a lot from seeing how they do it! You don't necessarily need to have an accountant if you're self-employed, but they can certainly make your life easier. Understanding business expenses like the home office deduction, or how HST regulations apply to your situation, can be complex. On that note, other more complex situations like taxable investment income or foreign income would also be a flag to reach out to a professional for advice.

What is auditing, when does it happen and what should I do if I get audited?

Jessica: Auditing is the CRA's way to ensure that the tax system is working as it should, and that your tax return is honest and accurate. If you get audited, it just means the CRA wants to examine your books or records to ensure what is on your return matches your records.  

Lisa: Audits can happen through random selection or if something on your tax return is a red flag that you might have made a mistake. If you do get audited, you'll be given a letter with instructions on what to do. Sometimes it's as simple as mailing in a copy of a receipt; in other situations, you might get a visit from a CRA representative.

Jessica: You may never get audited, but it's important to be prepared. If you want some backup, contact a tax accountant to help.

Do you have any other personal tips you've developed to make tax time pain-free?

Jessica: When you want to start prepping for tax time, use a tax prep checklist to get all the right documents in order. Also, give yourself plenty of time, and house all of your tax documents and receipts in one place throughout the year so everything is easy to find. I use a few folders on my computer hard drive and a box for paper receipts.

Lisa: Don't underestimate the importance of mindset. I really believe that our experience in life is determined by our thoughts and beliefs … if you think, "Tax season is so stressful," then it will be. Try shifting those thoughts to something like, "This year is an opportunity for me to learn about RRSPs or get more organized."

Eva Voinigescu is a freelance journalist and producer. She writes about health and science, careers, and culture.