Tax time is confusing for many of us. Understanding the various deductions and credits is easier than brain surgery, but only slightly. As a result, key decisions about what to put in and what to leave out are often made on a whim -- with disastrous results. In the interest of bringing order out of chaos, here are 10 tips that could save you a bundle and help you avoid problems with the taxman.
1. File on time.
If you don't file your return by the deadline and you have a tax balance owing, you'll face an automatic penalty of 5 per cent of that balance plus one percentage point for each month the return is not filed, for a maximum of 12 months. If you're a repeat offender, the penalties can be double these amounts. Further, the Canada Customs and Revenue Agency (CCRA) is permitted, but not obligated, to provide relief from penalties and interest levied in many situations, and being a delinquent filer only hurts your chances of ever getting that relief.
2. File it right the first time.
There's nothing that can attract an audit or review of certain items on your tax return like going back and changing your return after it has already been filed. This is particularly true where you want to claim a deduction or credit that the CCRA normally is prone to review (such as moving expenses, child care, or medical expenses), or you want to change the manner in which you reported something (like changing regular income to a capital gain where either treatment could be defensible). Having said this, you shouldn't be concerned if the change is not considered aggressive and you have all the receipts or documentation handy.
3. File after comparing
with last year.
As a tax professional who has prepared countless tax returns over the years, one of the first tricks of the trade I learned was to always compare a tax return to the prior year's return before sending it to the CCRA. If there's a difference from the prior year in the type or amount of income, deductions, or credits, the next step is to find out why. This simple little task can reveal mistakes in your tax return this year before you file, or can uncover mistakes made in a prior year that could be corrected.
4. File for your kids.
If you have children, of any age, who have earned income, be sure that they file a tax return this year. Provided your child's income is under $7,412 for 2001, he or she will have no tax to pay, but filing a return will create valuable registered retirement savings plan contribution room, which can be used in the future to save tax. Further, once your child has reached age 19, he'll be entitled to a GST credit which will often mean over $200 cash in his pocket, in addition to any provincial refundable credits available.
5. File a T1 adjustment request.
In the course of preparing your tax return this year, pull out your tax return for last year. You may just discover a mistake or two. If so, be sure to file Form T1-ADJ which is a one-page adjustment request for your past tax return. The CCRA may ask questions about the change you're requesting, but provided you've got the proper receipts or other backup, filing the T1-ADJ should allow you to recover some tax.
6. File a notice of objection.
After you've filed your tax return you can expect a notice of assessment from the CCRA. Don't just file this away without looking at it. If your tax return was not assessed as you had filed it, be sure to find out why. If necessary, file a notice of objection addressed to the Chief of Appeals at your local CCRA office. This is supposed to result in an impartial review of your objection by someone outside of the Audit Branch of the CCRA. The notice of objection is due within 90 days of the date on your notice of assessment, or within one year of the original due date of your tax return -- whichever is later.
7. File form GST370.
If you're an employee or partner who is entitled to deduct certain expenses from your income, such as automobile expenses, you can also generally claim a rebate of the goods and services tax (or the harmonized sales tax) paid on those expenses. You'll have to file form GST370 to claim the rebate, but don't forget to file -- it's cash in your pocket.
8. File form T1A.
You may be familiar with the fact that capital losses can be used to offset capital gains. If you triggered capital losses in 2001 and don't have sufficient capital gains in the same year against which to apply those losses, you'll be able to carry those losses forward indefinitely until they are used, or you can carry those losses back up to three years to offset capital gains reported in 1998, 1999 or 2000, in which case you'll recover some tax you might have paid in a prior year. You'll save more tax by carrying your losses back to 1998 or 1999 when capital gains were taxed at higher rates. You can accomplish this by filing Form T1A with your tax return this year.
9. File foreign investment
If you own or have interests in foreign property with a cost aggregating more than $100,000 you'll have to file form T1135 with the CCRA disclosing these assets. Foreign property includes foreign bank accounts, rental properties, Canadian securities held outside Canada, investments in foreign corporations, trusts, partnerships or other foreign entities. Similar reporting rules apply if you own shares in a foreign affiliate, or transfer money to or receive distributions from an offshore trust. The rules are complex enough that you should get some help from a tax pro if they apply to you, and the penalties are steep if you fail to file -- so be sure to file.
10. File electronically.
There are three ways to electronically file your tax return: Efile, Netfile and Telefile. The benefits of filing electronically are threefold: (A) Any refund you're expecting will come back sooner -- usually within two to three weeks. (B) You don't need to send in all the receipts and other usual paperwork, which reduces the burden of filing. (Don't forget to keep your receipts and other documentation handy in case the CCRA wants to see it later.) (C) Your return cannot normally be reassessed by the CCRA after three years has passed from the date on your notice of assessment, and electronic filing will start that three-year clock sooner. Finally, filing electronically today does not mean having to make your payment right away if you owe a balance. You still have until April 30 to make that payment.
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game 2002, Winning the Estate Planning Game, and is managing director, Tax Smart Services, AIC Group of Funds.
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