Did you survive another tax season?

By Fin MacDonald

As I write this article (April 13) the Canada Revenue Agency's computer systems have been shut down for five days now. So, I DO know that the filing deadline has been extended to at least May 5, maybe more. So, tax season may not yet be over (it isn't for the self-employed, who have until June 16 to file) depending upon when you are reading this article, but I am going to look forward with some tax planning ideas.

Was your refund too big?

I realize that this sounds like a strange question but it is one to look at. If you are continually getting large refunds, I have some questions: Are you able to manage your money? Would you rather have your refund as an increase in your monthly after tax income? Do you have regular deductions or tax credits that cause these repeated large refunds? Do you have tax deducted at source from your employment?  If the answer is Yes, you may want to consider completing a form T1213 Request to Reduce Tax Deductions at Source. ().

This form is one that is completed each year and submitted to the CRA, who then authorize your employer to reduce your source deduction of income tax. Some examples of the regular deductions are:

• Pre-authorized monthly RRSP contributions
• Spousal Support Payments made pursuant to a court order
• Child Care expenses
• Employment expenses, for example, having to use your vehicle for work
• Interest on investment loans or the fees charged by your broker or financial advisor

If you are retired and your refund is large every year, consider having the amount of tax taken off your CPP, OAS or Retirement Pension reduced. No need to fill out a form for this; notify the payer that you want the amount of tax deducted reduced.

Is the CRA requiring you to make Installment Payments?

Here is the other side of the coin. If you have more than $3,000 owing each year - and this means the amount not covered by other deductions of tax - the CRA can require you to make quarterly installments. The exact requirement occurs if: In two out of the last three years you had $3,000 or more owing, you are then required to make Installment Payments. This comes back to one of the questions I posed above: Are you able to manage your money? If you are, and are not concerned at having to pay just under $3,000 every April 30, then here is my suggestion.

For example, you are retired and have a total tax bill each year of $6,000. You currently have tax deducted at source in the amount of $2,000. This leaves you owing $4,000 at tax time. By arranging to have another $1,100 in tax deductions from one of your pensions you will free yourself from the obligation of making the quarterly installment payments. This will leave another $275 per month in your pockets to use as you wish until the following April 30.

Now, as I have written before, some folks are unable to save money and use the overpayment of their taxes as a forced savings plan. This enables them to amass a sum to use for special needs. If this works for them, OK.

Record Keeping

A question I am often asked is: How long do I have to keep my tax returns? The answer is six years. The CRA may go back three years to re-assess you but they may go back ten years if they suspect there was deliberate misrepresentation on your part. You may go back up to ten years to request an adjustment to your taxes. Often times this is triggered when a person realizes that there are deductions they were not aware of. An example: I was asking a client about changes in her tax return from the previous year. I told her she had a medical claim; did she pay premiums for Blue Cross or similar private medical and dental health insurance? She did and was not aware that these premiums, unlike MSP premiums, are deductible. Now, she is looking back through her records to the previous years to find the paperwork needed to make an adjustment to retrieve more of her hard earned money from the CRA.

For self-employed individuals record keeping is of paramount importance. All of us who are self-employed know that at some point, the CRA is going to want to see our records. One way to make this process at little easier is to have a separate credit union or bank account for your business. Another suggestion in this era of computers is to make sure you back up your records regularly; get into the habit of doing it each day at the same time.

One area that many self-employed have trouble with is keeping track of vehicle use; how much is personal and how much is business use. When I talk to clients about this some are receptive, others are not. Some find the requirement too onerous; keeping the daily log to show how much was business and how much is personal IS work! Getting into the habit is important; soon it will be second nature. The consequences of not keeping the log can be severe; without the proof the CRA may re-assess you. The CRA recently relaxed the log requirement by only requiring a full year log for the first year, for subsequent years only a three month period of each year is required. This assumes the business/personal split has remained constant.

I hope you have enjoyed reading my tax tales. As always, I look at Taxes through my lens of Helping You to Keep More of YOUR Money! Next time, some interesting and some amusing cases from the Tax Court of Canada.