It's that wonderful time of year - when we dig deep into our shoeboxes full of receipts and wait eagerly for official tax documents to arrive in the mail, so we can file our tax refund before the end of April. Are you ready for it this year? Did you keep a good record of all the charitable contributions you made, the receipts you can write off and are you aware of all the incentives you might qualify for? Being organized pays off; in 2012, the average family of four could have saved more than $3,200 annually in taxes, according to Canada Revenue Agency (CRA).
Don’t worry - most of us aren’t that organized! The good news is you still have time to get it all in order. Here are the six steps to get ready for tax season.
Set aside at least one weekend to get your tax receipts and documents in order. Take an extra day if you're filing on your own to sit down and input the numbers. Find the obvious stuff first: T4 slips or if you’re self-employed all your invoice advice documents. Print out the official RRSP tax receipts and track down all your official charitable contribution documents.
Visit the Canada Revenue Agency (CRA) website to investigate the incentives you and your family qualify for. Check out things like the child fitness credit, moving credit and education credit (see below for a full list). There are numerous tax incentives that you may be able to take advantage of. Live agents are also on hand to answer tax questions and you can call in anonymously. Talk to colleagues doing a similar job and cross-reference how you both file your refunds to make sure you’re not missing anything.
There is also a lot of confusion surrounding tax deductions and tax credits. Both terms are often used interchangeably – but they’re not the same thing. Although both can lead to tax savings, how your savings are calculated varies slightly with each.
Which one is better? Unless you’re in the lowest tax bracket, you’ll reap the greatest tax savings a tax deduction.
If you have a particularly complicated tax return, it might a good move to seek the advice of a professional. If your tax refund is fairly simple you can use one of the reputable online tax filing programs to complete your refund. Remember to file online, sending your refund through snail mail delays your process by up to six weeks.
If your calculations show you owe money to the CRA, start putting it aside now. This will help you save enough to pay the balance off before it costs you more in the form of interest and penalties. The faster you pay off your tax bill the better.
Also, investigate what changes you need to make this year to avoid paying next year. One of the easiest ways to lessen your tax impact is by contributing to your RRSP. By checking your last year Notice of Assessment you can calculate how much room you have. If you’re in the highest income level (generally making more than $132,406), contributing can be very beneficial.
“It is important for Canadians who are having difficulty managing debt, or think they will owe on their taxes, to take advantage of any tax savings opportunity,” says Chris Mazur, trustee in bankruptcy and partner of BDO Canada. “These opportunities may be in the form of tax deductions or credits, which may help reduce the amount of tax owed, or even result in a refund that can be used to pay down other debt.”
You can reduce your tax bill significantly by implementing income-splitting strategies if your spouse is in a lower income bracket. When you retire and withdraw money from your RRSP, you will be taxed. By setting up a Spousal RRSP, you can transfer a portion of that income into your spouse's RRSP to be taxed at lower rates when it's withdrawn by your spouse and after age 65. The contributor to the Spousal RRSP is able to bring their room down and still enjoy the tax benefit of getting a larger refund.
Start planning now for next year's tax season. Create a filing system to keep all your important documents organized. Have a permanent place for your employment records, charitable receipts and RRSP contributions documents. Also have one place, like a big shoebox, to put all your 2012 receipts. You never know what could be considered a tax-deductible expense and keeping all your receipts will save you money.
Here is the list of the most common tax deductions and credits you can claim, courtesy of BDO Canada Limited.