On a scale of one to 10, the fun derived from preparing your tax return rates about a one -- on par with a root canal. But the process shouldn't end when you drop your tax return into the mailbox or hit the "submit" key to file electronically. There are a number of things to keep in mind after you've filed your tax return that can help you to save tax and minimize future problems with the tax collector. Here are seven ideas.
1. Take stock of where you are.
If you've filed your return, glance at a few figures to see where you stand. Then, consider making the following changes in May to improve your tax bill for 2005.
Line 121: If you reported meaningful interest or other income on Line 121, consider rebalancing your portfolio in May to earn capital gains for 2005 instead. Also consider swapping assets with your RRSP to put the highly taxed interest-bearing investments in the plan and bring some tax-efficient equities outside. See my article, Jan. 13, 2001, at timcestnick.com.
Line 114: If you and your spouse reported income at Line 114, consider splitting your CPP benefits. You see, you're able to split your benefits in that you can add your CPP benefits together with your spouse's and each claim 50 per cent of the combined benefit. This will save tax over all if you're in a different tax bracket than your spouse. Call Human Resources and Skills Development Canada in May to set this up.
Line 162: If you had no numbers on Line 162, you're missing a chance to save tax. Any type of part-time self-employment will allow you to deduct costs you're paying for anyway, including home and vehicle costs. Consider starting a home-based business in May. See my article from April 23.
2. File a T1 Adjustment.
If you've discovered after filing that you forgot a deduction, missed a slip, or made another mistake, you can correct the problem by filing a T1 Adjustment Request, Form T1-ADJ. This could save you tax, or allow you to avoid headaches when the Canada Revenue Agency (CRA) notices that you failed to file a slip. Get a copy of the form at cra.gc.ca.
3. Consider a voluntary disclosure.
So, you evaded tax by overstating your deductions or credits, or failing to report all your income on your return. Now what? If the tax evaded is large, consider a voluntary disclosure (VD) -- that is, telling the tax collector that you've been naughty.
A VD will allow you to side-step penalties and prosecution. That's the good news. The bad news? It can be a time-consuming process where the CRA may look into your affairs in depth. For a VD to be effective, you have to approach the CRA before they come knocking, and you must disclose everything you've done wrong. Talk to a tax pro before going this route.
4. File a Notice of Objection.
When you receive your Notice of Assessment (NOA) from the CRA, you might disagree with changes to your tax return. So, give the CRA a call to resolve the issue by phone. If that fails, consider filing a Notice of Objection (Form T400A). The deadline can be as soon as 90 days following the date on your NOA -- so act fast. The objection should set out the facts, your reasons for objecting, and what you'd like the CRA to do about it. From my experience, most people give pretty lame reasons for objecting. They are convincing to no one who understands tax. My advice? Get a tax pro involved to build an argument that you're right and the CRA is wrong.
5. Minimize your instalments.
There's no point in sending the CRA more money in 2005 than necessary. If you pay instalments, you have various methods available to calculate them. The first is to pay what the CRA requests in the notices you'll receive by mail. Another method is to look at your 2004 tax return in May and estimate your 2005 taxes based on how your income will compare to 2004. If you estimate your taxes to be lower in 2005, it can make sense to base your instalments on that estimate rather than the CRA's requests. Be aware, however, that remitting deficient instalments in 2005 can lead to interest and penalties, but not if you pay what the CRA asks.
6. Apply to reduce source deductions.
If your 2004 tax return shows a big refund, consider filing Form T1213 in May to request a reduction in the taxes deducted from your pay. If you're expecting to claim any of a long list of common items on next year's return, and these will give rise to a refund, you can apply to have the tax deducted from your pay reduced. You'll effectively get your refund earlier in the form of increased take-home pay.
7. Claim relief under the fairness rules.
If you're going to face interest, penalties, or other unfair tax treatment on your 2004 return, you may be allowed some relief. The fairness rules in our tax law allow the CRA to waive interest and penalties and perform other acts to help you out -- particularly when circumstances were beyond your control. Contact your local CRA office.
Last-minute check-off list
Haven't filed your tax return yet? You have until midnight Monday to file. Don't forget this checklist of things that will save you a few bucks:
File for a minor
File a return for a minor child who earned income; it will create RRSP contribution room for use later.
Defer your deduction
Consider deferring your RRSP deduction to claim it against higher income next year. (Schedule 7)
Claim employment expenses
Claim employment expenses for which you did not receive a tax-free allowance or reimbursement. (Forms T2200 and T777)
Claim a rebate of GST if you claim expenses as an employee or partner. (Form GST370)
EI and CPP overpayment
Claim a refund of excess Employment Insurance premiums and Canada Pension Plan contributions made. (Form T2204)
Transfer credits to spouse
Transfer tuition, education, pension, age, and disability credits to your spouse if you can't benefit from claiming them. (Schedule 2)
Transfer Canadian dividends from one spouse or common-law partner to the other where it increases the spousal amount and saves you tax as a couple. (Line 120)
Claim medical expenses
Report all medical expenses on the return of the lower-income spouse or partner. (Line 330)
Report all donations on the tax return of one spouse or partner. (Schedule 9)
Claim the eligible dependant credit if you are single and supported someone living with you. (Line 305)
Student loan interest
Claim interest on student loans offered under a government loan program. (Line 319)
Safety deposit box fees
Deduct your safety deposit box fees as a carrying charge. (Schedule 4, Part IV)
Repayment of benefits
Claim a deduction for repayment of government benefits such as Old Age Security and Employment Insurance. (Line 235)
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