By the beginning of June, most taxpayers have filed their annual return for the previous year and have most likely received a Notice of Assessment (NOA) for that return, containing the good or bad news about their tax situation for the year. At this point, most Canadians are probably happy to put taxes out of sight and out of mind until next year’s filing season rolls around. For a number of reasons, however, that’s not the best strategy.
The mid-point of the year is, in fact, a very good time to take a look at one’s current year tax situation, to determine whether things are on track for the year or, if not, how to make things right while there’s still time to do so. There are a few basic steps which require no more than a few hours’ time to make sure of just that.
Bring tax filings up to date
It may seem obvious that a tax return needs to be filed each year, but every year millions of Canadians fail to do so, for a variety of reasons. Often it is because money will be owed (or is already owed from previous years) to the Canada Revenue Agency (CRA). In other cases, taxpayers who have no balance of taxes owing but also aren’t expecting a significant refund assume that completing and filing a return is just unnecessary work and aggravation. In both situations, not filing is the wrong answer, but for different reasons.
Taxpayers who owe money to the CRA but who do not file on time are automatically assessed a late-filing penalty. This penalty is 5% of the outstanding amount owed, plus 1% for each complete month where the failure to file continues, for a maximum of 12 months. These penalties double when a penalty has been assessed for a previous failure to file within the past three years, and can continue for a maximum of 20 months, instead of 12 months. Interest on any outstanding tax amount owed has also been accruing since May 3 of this year, at a rate of 5%, compounded daily.
Even where a taxpayer doesn’t have the funds to make payment in full, or at all, it is in his or her best interests to file a return, explain the situation to the CRA, and agree on a payment arrangement to get the outstanding amount paid over time. Doing so will stop the late-filing penalties from accruing and will limit the amount of interest payable, as the debt is gradually paid off.
Not filing because there’s nothing owed is a mistake of a different kind. Both the federal and provincial governments provide taxpayers with a variety of refundable tax credit programs, generally administered by way of direct monthly payments to qualifying taxpayers. Unlike the tax year, the benefit year for such programs generally runs from July 1 of one year to June 30 of the following year, for good reason. Entitlement to benefits for almost all such programs is based on the taxpayer’s financial and family circumstances – starting with his or her income. In most cases, entitlement to benefits and the amount of any benefits receivable between July 1, 2016 and June 30, 2017 is based on the taxpayer’s income for 2015.
Where a taxpayer has filed by the April 30 deadline, it’s possible for the federal and provincial governments to assess his or her return, determine income for 2015 and to calculate the amount of federal and provincial benefits that the taxpayer will be entitled to receive, all in time for the first such benefits to be paid when the benefit year starts in July 2016. Where a taxpayer doesn’t file by the April 30 deadline, that process is obviously short-circuited and taxpayers who would otherwise begin receiving benefits at the start of the 2016-17 benefit year in July 2016 will be disappointed. The problem is easily solved – once a taxpayer files a return for 2015, an assessment of income and benefits entitlement for the year can be done and benefits to which the taxpayer is entitled can be provided. The later the taxpayer files, however, the longer the payment of such benefits will be delayed.
Making sure source deductions are correct
Taxpayers don’t only pay taxes when they file an income tax return each spring – the majority of taxpayers who are employees pay taxes throughout the year, by means of amounts deducted from their paycheques, technically known as deductions at source.
Of course, each taxpayer’s situation is unique, and so the employer has to have some guidance as to how much to deduct and remit on behalf of each individual taxpayer. That guidance is provided by the employee/taxpayer in the form of TD1 forms which are completed and signed by every employee, sometimes at the start of each tax year but certainly at the time employment commences. Each employee must in fact complete two TD1 forms – one for federal tax purposes and the other for provincial tax imposed by the province in which the taxpayer resides and works. Federal and provincial TD1 forms for 2016 list the most common statutory credits and deductions claimed by taxpayers, including the basic personal credit, the spousal credit amount, and the age amount. Adding amounts claimed on each form gives the Total Claim Amounts (one federal, one provincial), which the employer then uses to determine, based on tables issued by the CRA, the amount of income tax which should be deducted (or withheld) from each of the employee’s paycheques and remitted on his or her behalf to the government.
That said, every individual’s circumstances can change, and sometimes those changes mean a change in their tax liability for the year. Most important changes in life have tax consequences, and it’s worth making sure that one’s family and financial circumstances are accurately reflected in the deductions being made from one’s paycheque. The best way to do so is by checking the federal and provincial TD1 forms currently on file with one’s employer. Where circumstances have changed such that source deductions also need to change, the easiest way to ensure that is to provide the employer with new federal and provincial TD1 forms which reflect those changed circumstances.
Where the taxpayer has available deductions which cannot be recorded on the TD1, it makes things a little more complicated, but it’s still possible to have source deductions adjusted to accurately reflect tax liability. The way to do so is to file a Form T1213, Request to Reduce Tax Deductions at Source (available on the CRA website) with the CRA. Once that form is filed with the CRA, the Agency will authorize the employer to reduce the amount of tax being withheld at source to more accurately reflect the taxpayer’s actual tax owing for the year. In most cases, taxpayers who file a Form T1213 do so because they are incurring expenditures which, while deductible for tax purposes, don’t show up on the TD1. Most commonly, those are expenditures like deductible support payments, child care expenses incurred or contributions to a registered retirement savings plan (RRSP).
