As the calendar turns to February, Canadians began thinking about their annual ritual of preparing income tax returns. What can you do to get ready for tax time and make life a little easier for yourself?
Get Ready for Tax Time and File on Time
Regardless of your financial situation, it’s imperative to file your income taxes on time. For the vast majority, the deadline is April 30th each year. If you or your spouse/partner are self-employed, you have until June 15th to file without penalty. Penalties are charged as 5% of your balance owing, plus an additional 1% for each month you are late. If your tax owing is $1,000 and you file three months late, the total penalty is $80. Filing late is like throwing money away.
If you are expecting a refund, you want to file on time or even early. There is no reason to allow the government to hold your money any longer than necessary.
What if I Owe Taxes but Don’t Have the Money?
The Canada Revenue Agency (CRA) charges interest on outstanding balances due, including penalties, at the prescribed rate, on a monthly basis. Interest is compounded monthly (and usually has a relationship to long-term treasury bonds but is open to regulation changes). As of January 2021, the interest rate is 5%. Interest is calculated from May 1st onward regardless of when you file, as the due date for taxes is April 30th. Note that even for self-employed individuals with the extended filing deadline, any taxes due are payable on April 30th.
Do I Need Professional Help to File a Tax Return?
This can be a controversial topic, but in general, the answer is no. The Canadian tax system is relatively simple, despite its apparent size. While the Federal T1 form is 4 pages long, and the standard package (9 additional schedules plus provincial returns), seems daunting, have a close look at what you’ll likely be filling out. Typically, you may have a T4 slip, charitable donations, medical expenses, union dues, and RRSPs. This means entering unique information on less than 20 lines on the tax return, using simple arithmetic. However, the CRA has been actively pushing electronic submissions. There are plenty of free software tools available, which will complete all the arithmetic for you, and are acceptable for submission to the CRA.
Consider the cost when deciding whether to seek a professional. We recommend calling multiple tax professionals in your area to get an estimate on how much the cost will be.
Which Debt Do I Pay … Taxes or Credit Cards?
When you have a tax amount outstanding and high credit card debt, you may struggle over which to pay first. The CRA will always advocate for paying them first … but given the differential in interest rates (CRA debt is about 5%, credit cards are about 20%) the answer seems clear.
Check back here on our blog for future tips on how to get ready for tax time throughout the year, with the intent of getting a tax refund. If you need help figuring out what debt to pay off first or help paying off tax debt, book your free consultation with us now.