Your income tax tool kit
The witching hour is upon us. While accountants across the land remain locked
in their annual self-imposed exile -- the rite of spring otherwise known as tax
season -- do-it-yourselfers still have a couple of days left to complete their
own income tax returns before the filing deadline on Monday, May 2 at midnight.
If you've procrastinated this long, chances are it's because you're daunted
by the task at hand. But don't be. This collection of tax facts and filing tips
will help you coast to the finish both this year and (for those who've already
received, and possibly spent, their 2004 tax refunds) next year, as well.
Can't find one of your information slips? Relax: All is not lost. While you
should have received all of your tax information slips or receipts by the end of
March, if you are still missing one or more slips, simply estimate the amount of
the income noted on the slip and report it on your return. You should also
attach a note to your return explaining which slip is missing. Even if your
estimate isn't bang-on, this move will help you get your return in the mail on
time and avoid any late-filing penalties.
Believe it or not, some tax return "do-overs" are allowed. So if an
information slip or donation receipt turns up after you've already filed, no
problem -- there are a couple of easy ways to amend your return.
Technology-savvy filers can use the "My Account" service on Canada Revenue
Agency's secure Web site (www.cra.gc.ca/myaccount), which allows you to correct
or amend your return by specifying the line item and new amount you want
reported. Note, however, that you can only use this service after you have
received your initial Notice of Assessment from the CRA.
"My Account" also allows you to get personalized information about your RRSP
contributions and deduction limits, your contributions and required 2004
repayments to the Home Buyers' Plan or Lifelong Learning Plan, as well as
information about payments, installments, outstanding balances, and statements
For the less Web-inclined, you can also easily amend your return by
completing the one-page CRA Form T1-ADJ, "T1 Adjustment Request" and mailing it
in to the Individual Client Services and Benefits Division of your tax centre
(the address is on the back of the form).
Though you'd probably rather be golfing, do not be deterred from your primary
focus this weekend, which is to buckle down and do your taxes. The importance of
filing on time cannot be over-emphasized.
If you're late, there is an automatic 5% penalty on the amount of tax that
was unpaid at the time the return was due, plus an additional penalty of 1% per
month on the amount due for each month the return is late, up to a maximum of
However, if this is the second time you've been late filing, and you've been
previously been assessed a late-filing penalty in any of the previous three
years, the late-filing penalties double to 10% of the unpaid amount plus 2% for
each late month you're late, to a maximum of 20 months. Note, however, that this
higher penalty would only be charged if you also received a formal demand to
file from the Canada Revenue Agency.
The penalty is slightly less stringent if you manage to file your return on
time but (perhaps due to a temporary cash flow problem) you fail to pay the
required amount of tax on time. In that case, you will only be subject to what's
called "arrears interest". The interest, which is not tax deductible, is
compounded daily and charged at the CRA prescribed rate plus an additional 4%
(for example, for April to June, 2005, the rate is: 3% + 4% = 7%).
The penalties for late-filed returns are also subject to arrears interest
from the return due date onwards, meaning you get slapped on the wrist twice if
you're late not only with your payment, but with your completed tax return as
Based on the above rules, you might assume there really is no rush to file if
you are due a refund, since any potential penalties and interest exigible are
based on an amount owing. This is not necessarily good advice because if in a
future year your 2004 return is audited and reassessed by the CRA -- turning
what was originally a tax refund into an amount owing -- late filing of the
return would attract the penalties and interest discussed above. This could be
of significant concern to anyone who invested in a tax shelter in the past few
years that is under review by the CRA. Should the CRA ultimately disallow the
deductions you claimed, your large tax refund from a prior year could turn into
a substantial tax liability, with costly late-filing penalties and arrears
interest to boot.
REPRIEVE FOR THE SELF-EMPLOYED
While the deadline of May 2 applies to most taxpayers, there are actually two
tax deadlines: the "filing-due date" and the "balance-due date."
The "filing-due date" for most individuals is May 2, 2005, unless you, or
your spouse or partner, were self-employed (i.e. carried on a business) in 2004,
in which case both of you have until June 15, 2005, to file.
But it's important to note that the extended June 15 filing deadline for the
self-employed does not extend your "balance-due date" for paying any taxes that
may be owing for 2004; if you owe the CRA money, it's still due this Monday. So
even if your return is not actually due for another six weeks, you should do at
least a rough draft of your return this weekend to see if you actually owe any
money before Monday.
BEAT THE TAXMAN
So, after all that work, you're elated to discover that you are owed a tax
refund for 2004. My sincere condolences.
A tax refund is a sign of poor tax planning. It means that you have loaned
your hard-earned money to the government, interest-free, for up to 16 months.
For Canadians who have tax withheld at source by their employers, the most
common reason for a refund on your tax return is RRSP contributions that are
deducted on your return but are not taken into account by your employer when
calculating your weekly paycheque.
Luckily, this can be easily remedied by completing and filing CRA's Form
T1213, "Request to Reduce Tax Deductions at Source" which, once approved by the
CRA, authorizes your employer to reduce your taxes withheld at source. By
completing this form now for 2005, you can ensure that you never again get
another tax refund -- the ultimate sign of good tax planning.
GRAPHIC: Black & White
Photo: (Abacus).; Black & White