April is the month in Canada where all residents file their tax returns to the Canadian Revenue Agency. This year the deadline to file your tax return is April 30, 2016. It’s still many weeks away, but that date seems to creep up on us faster than we know it. So should we file our tax returns now?
Before filing your tax returns, it’s important to ensure that all your documentation has been received. You don’t want to misrepresent your tax return. Trying to cheat the CRA from taxes is like trying to lie to your girlfriend when she already knows of your misdeeds.
If you’re not sure what kind of forms you should be receiving then continue reading.
The most common form is the T4 form for salary earned from employment. Your employer should already have issued this form to you months ago. If you haven’t received this form then your employer is definitely doing something wrong. Or you’re not really employed! Where’s the money coming from?
If you are working as an employee then there is a requirement by law that the employer must issue your T4 by the following February following the year of employment. That means you should have received your T4 in the mail or in person by February 29, 2016. If your employer forgot, then they are subject to a fine of $25 a day for which they haven’t sent it out. You should be reporting this violation to the CRA if you haven’t received your T4 yet. If you are late on your tax return because you never received your form, the CRA should know why and if you try to plead ignorance then put a comment down on my blog and tell me how it goes.
The only time you may not be receiving a T4 from an employer is if you are self-employed. That is because the client considers you to be a vendor and not an employee so they are not obligated to issue a T4 for your services. In this case, you need to treat yourself as a business and file your revenue as income earned.
If you happen to be retired or you are collecting money from annuities, you might receive a T4A form that outlines the amount of money that you have received for the year. Like employment income, pension income is taxed. Yes, even in retirement your income is taxed. Can we never get a break?
You will need these forms to prepare your tax return because there could be other sources of income where taxes have yet to be deducted. For retirees, your pension income sets the baseline for which marginal taxes are applied. The more pension income you make the higher the tax bracket your other income will be taxed at. There are ways to split out pension income, but that’s beyond the scope of this post.
Interest and Dividend Income
It’s really hard to make any kind of interest income from the bank these days, but that doesn’t mean you won’t be receiving any tax forms. Even if you make one dollar, the bank is obligated to send you a T5 form outlining any interest income that was earned.
If you are invested in equities of any kind that provide dividend income, you will also be mailed a T5 slip. Dividend income will generally be split up between Canadian sources and foreign sources. That’s because Canadian dividends get a preferential tax credit that reduces the amount of taxes that you need to pay for dividend income. Foreign income earned through dividends don’t get the same treatment.
It can get confusing trying to understand the information on the T5 forms, but don’t worry. There’s a reason why we all use tax return software to help us create our tax returns.
If you invest in income trust or certain mutual funds that are designated as trusts, then you will receive another form called a T3 form. This form outlines income earned from trusts.
Such income may derive from sources such as real estate income trusts or REITs for short.You may also receive income from preferred shares that may also get reported under a T3 form. Depending on the type of income that you are receiving from income trusts, it may or may not be taxed. That’s because some trusts, such as REITs, tend to return back a part of the capital investment as a dividend. This complicates things because return of capital actually decreases the purchase price of the stock. Hopefully you have a good spreadsheet handy to keep track of the new cost of your investment.
The financial institution that issues the T3 is usually kind enough to outline the type of income being returned from trusts. This makes life a lot easier when you need to enter your T3 income in your tax return.
One of the things that we forget is that charitable donations are tax deductible in Canada. If you’ve made any contributions over the course of the year, the charity you donated to can have the option of providing a donation tax receipt that you can use to claim as a tax credit. It isn’t by law for the charity to issue tax receipts. Unlike employers, there are no obligations by the charity to issue a receipt, so don’t go harassing charities for a tax credit.
You may have received a tax receipt upon donation through a website, or you may receive them through the mail. Prior to preparing your tax return, you should make sure to browse through your emails or to check your old mail to ensure you haven’t missed any receipts that were sent your way.
If you have made any contributions to your RRSP accounts, then the financial institution where you made the contribution is responsible for sending you a contribution receipt. This receipt is required to prove that you actually made a contribution.
Generally RRSP contribution receipts are issued the moment you make the contribution. So it may have arrived a while ago. Make sure you don’t misplace these receipts. I hope this advice wasn’t too late!
In order for a contribution to be eligible on your 2015 tax return, you must have contributed to your RRSP account prior to March 1, 2016. That was the deadline to make a contribution for the 2015 calendar year. Any new contributions after that date is not eligible for your 2015 tax return, so be sure to save these receipts for next year.
If for whatever reason you happen to file your tax return and submit it before you receive all your tax forms, don’t panic. It’s not the end of the world. In this day in age, the exercise of filing a tax return has really become a moot exercise. The CRA knows almost everything. That’s why I tell you to never try to cheat them.
If you make a mistake on your filing, the CRA will generally send you a letter to inform you that you made a mistake and to file a reassessment or an adjustment to an existing tax return. This is the T1 slip. You can choose to wait for the CRA to inform you of your blunder, but it might cost you some interest if you need to pay taxes. Alternatively, you can file a T1 adjustment yourself and inform the CRA of your mistake. It’s up to you.
Remember the Deadline!
Remember that you have until the end of the month, April 30, 2016, to complete your tax return. There’s really no excuse to miss this deadline since there are numerous free tax software options to use and you still have almost 4 weeks to go.
Mark your calendars. Set up a tax return weekend party with friends. Do whatever it takes to get it done. Besides, if you are expecting to get money back, why wouldn’t you want to get it back as soon as possible?