It's nine o'clock on a Monday night and Estelle is finally sneaking out of her twin daughters' room after getting them down for bed. She rubs her own tired eyes, takes a deep breath, and wanders into the kitchen. Her husband James is up to his elbows in dish water, rinsing the dinner plates and loading the dishwasher, so Estelle grabs the broom and gets busy sweeping the crumbs and pieces of fly-away food that litter the floor.
Before finally crawling into bed at midnight, there's laundry to fold, a couple of light bulbs to change, and a project from work to finish for a meeting the next day. And at the very back of Estelle's mind is one more task she better tackle soon: taxes.
"Taxes" has been on Estelle's internal to-do list forever, it seems. It's already mid-July and she knows that she has been paying interest since the April 30 tax deadline came and went over two months ago. Still, she and James never seem to get around to filing.
"We've been so busy this year with the girls and work, that we just keep putting off doing our taxes," says Estelle. "Besides, half of my receipts are in piles all over the house. I don't even know where to start."
It's not until Estelle and James receive a late-filing notice from the Canada Revenue Agency that they're spurred into action. Although they used to file taxes on their own before their busy twins arrived the year before, the couple realizes that unless they make an appointment with a professional, they'll never get around to tackling the tax tiger.
They find an accountant through a friend, book a day off work and show up with all the tax forms and receipts they can find. Four hours later, Estelle and James are done—and a little richer than they realized, even after they've paid the accountant's fee.
"Hiring her was a great idea. She found ways to save us money we'd never thought of," Estelle says.
MANY TIME-PRESSED CANADIANS FEEL MORE THAN a tinge of tedium come tax time, which no doubt contributes to the over one million late tax returns filed each year in this country. So it's not just you. Tax forms are confusing at best and infuriating at worst as elected officials make piecemeal changes to the tax codes like a house renovation project gone mad. Throw in our own busy, cluttered, and chaotic lives and is it any wonder tax season seems so dreadfully . . . taxing?
It's time to kiss any feelings of tax dread goodbye because in this chapter we're going to show you how to uncover new ways to slash the dollars you pay this year. (Trust us. It's incredibly satisfying watching the numbers creep down as you type in your child's camp fees or watch your RRSP contributions in action.) Beyond that, you're also going to find out when it's a good idea to do your own taxes versus hiring a pro, how to keep on top of your paper trail, and what to do if the taxman cometh. And don't forget RRSPs. We'll be discussing their merits in more detail here too.
When Estelle and James were younger, less frazzled, and their tax situation was more straightforward, the do-it-yourself route made a lot of sense. They simply bought tax software, gathered up their T4s and other government forms sent to them by the end of March each year, grabbed the student loan interest documents, and settled in for an evening of plunking in numbers on the computer.
But now with children, daycare costs, RRSP contributions, a new home, and James's small web design business (an offshoot of his day job), filing taxes is far more complicated—and worrisome. James and Estelle don't have the time to become tax experts so they are certain they're missing out on tax reductions and making costly mistakes.
Competent tax specialists can save them both headaches and money—sometimes so much money it's enough to make up for the fees they charge—but what kind should Estelle and James hire?
Tax professionals fall into a few categories and one is not necessarily better than the other. They simply perform different functions. For instance a tax preparer generally has the least amount of training and fewest credentials, but is a great choice for those with an uncomplicated tax situation. H&R Block, one of the best-known tax preparation companies, has offices across the country, but there are other smaller companies too. Tax preparers are the most economical choice, charging about $150 for a basic return. (By way of comparison, QuickTax software runs about $40. You can even find basic online versions for free.)
Meanwhile certified general accountants are a good economical choice for people who have moderately complicated tax returns, but who don't need handholding throughout the year. Many CGAs can help you if you're self-employed. Try to find one that has some knowledge about your industry, however, so they can be better prepared to tell you if your, say, magazine subscriptions count as a business expense. Again, straightforward tax returns will be in the hundred dollar plus range, while more complex returns will mean paying several hundred dollars.
Chartered accounts, or CAs, tend to work in larger firms such as KPMG or Ernst & Young and have the expertise to prepare complicated returns and offer in-depth advice. If you have numerous tax shelters or live in two countries and file returns in both, a CA might be a good choice, but they will cost you. The same goes for tax lawyers who work for very-high-earner types with major tax conundrums. Expect to pay hundreds of dollars an hour if you hire one.
No matter who you choose, to get the job done right your tax specialist will need you to supply forms, receipts, RRSP information, and any other material to file your taxes quickly and easily. (In other words, don't show up at her office with a grocery bag full of receipts, dump them on her desk, and say, "You figure it out." That's not how it works.) So what is she looking for?
The previous year's notice of assessment
Any tax amounts paid by installments
A copy of last year's tax return (if you're a new client)
Details of personal changes such as birth, marriage, separation
Universal Child Care Benefit details
Receipts for public transit passes
Any T3, T4, or T5 forms covering employment, commissions, employment insurance, workers' compensation, Registered Retirement Income Funds, etc.
RRSP contribution slips
A gain/loss statement from your broker
Charitable donation receipts
Interest paid on student loans
Medical, dental, nursing home, or other private medical insurance receipts
Spousal support income/payments
Details of your dependants and their medical status
Child care information including receipts (for summer camp, list dates too)
Moving expenses
Be as organized as you possibly can. Tally your invoices and other records. Clip groups of receipts together or stuff them in corresponding envelopes with the category written at the top. Accountants are often paid by the hour so the less work you make them do, the less you'll be doling out for their services. You can find a more comprehensive list of documents needed on your province's Certified General Accountants website. In Ontario, for example, visit Cga-ontario.org.
Using professionals come tax time has a lot of advantages. It's convenient, for one. They can also save you hundreds of dollars in tax deductions. But preparing your own taxes has benefits too. You're not a slave to someone else's schedule (who is very often overworked and tired leading up to April 30), and you'll be able to see first-hand how your financial decisions have an impact on the amount of tax you pay. Don't like what you see? Make new decisions next year. And don't forget tax software. Some of the best choices such as QuickTax and UFile are actually simple, use plain language, and even give you hints and tips along the way.
File taxes yourself or go with a pro. No matter how you decide to pay the taxman, if you break out in a sweat just thinking about your box of crumpled receipts hiding in the closet (if they ever made it there in the first place) and a missing T4, it's time to take charge and become organized all year. These simple steps will keep you feeling calm and prepared come tax season.
Pick one place in your house to hang a (big) bag on the wall, or use an accordion file, and consider that your "Tax Zone." Every time you empty your wallet, pay a bill, or receive a piece of tax material (assessment forms, your T4, etc.), chuck the papers into the bag or file. There. Done.
Now create your system. Label each file by the appropriate tax category (transportation, RRSP contributions, charitable donations, utilities, medical expenses, daycare, etc.) and sort your receipts and papers into those categories. If you decide to use envelopes instead, take a three-hole punch to them and make them binder ready. Whatever works for you.
Using personal finance software is another good way to stay on top of the paper trail. Enter receipts and expenses into the fields provided each week and keep a running tab. Yes, it takes a bit of extra time now, but come April taxes will be a breeze.
Clear your desk and wallet of receipts regularly (say, every Sunday evening). As a result, your wallet will lose its bulge, and those receipts won't get lost or damaged by getting crunched in the bottom of your bag.
Do you need to keep every single receipt that comes in the door? Probably not. If you know for sure you can't write off your new DVD player, keep the receipt only until the warranty expires, then toss it out. As a general rule, keep your credit card statements, T4s, RRSP contribution documents, out-of-pocket medical expenses, charity receipts, or any other tax-filing information for six years—just in case you get audited. And when you do dispose of these papers, make sure to shred them, or at least any part of them that could identify you—your name, address, SIN, etc.
You would never walk into a store, pick up a new belt, and offer to pay more than the sticker price, would you? So why do so many Canadians hand over more money to the government than is required each year? It's time to find ways to increase your tax deductions—anything you can subtract from your income after totalling that income and before you calculate the final damage. Here are some tax write-offs (all perfectly legal) you may have never considered that could save you hundreds or thousands of dollars this year.
Throwing money into a Registered Retirement Savings Plan is so important that many accountants will tell you to borrow money to max out your contributions each year. Not only do RRSPs slash down the total taxes you'll pay, but by the time you withdraw the money at retirement age, you'll most likely be in a lower tax bracket so the taxes you pay on them will be smaller too. Not a bad deal. The percentage of your earnings that you can contribute to an RRSP rises each year, so check out the Canada Revenue Agency website to get the latest figures.
Want to make contributions hassle-free? Arrange for your deductions to come right off your paycheque each week or month instead of joining the bank lines and scrambling to make the deadline in February.
Just a word of caution about RRSP loans: if you are shelling out to pay off a handful of maxed-out credit cards, pay that debt down before taking on any new RRSP loan debt. You'll be getting a bigger bang for your buck.
Every parent knows that children take a big bite out of our assets. But guess what? They can actually save you money at tax time. Submitting daycare receipts isn't the only way to save on taxes, either. You can deduct fees for lunch and after-school programs and even summer camps. If you qualify and your child is under the age of seven, you could claim up to $7,000 a year. If your child is over seven but under 16 years of age, you may be able to claim up to $4,000. There is no age limit if you have a disabled child, and you might be able to claim up to $10,000. In general, the lower-income-earning spouse makes the claim.
Or sign your kids up for soccer, yoga, or anything else that moves their bodies. The Children's Fitness Tax Credit allows parents to claim up to $500 per year of money spent on sports or fitness programs for kids under 16. (Sorry, sports equipment doesn't qualify.)
And don't forget to collect the Canada Child Tax Benefit for children living with you under the age of 18. Just remember, the more money you earn, the less the government will grant you. Still, every parent with kids under six is eligible for the Universal Child Care Benefit, which pays $100 per month per child. But watch out: that hundred bucks is considered taxable income (which basically means the government is doling out the equivalent of hiring a sitter one evening a month. Don't get us started . . .).
Finally, if you're providing in-home care to ageing parents or grandparents over 65, or other sick people or dependent relatives 18 and older, the Caregiver Tax Credit may be yours for the taking.
Between tuition fees, textbooks, and their seemingly never-ending need for glue sticks (seriously, how much glue can a typical seven-year-old go through each day?), every little tax reduction you can ferret out helps. Use the textbook tax credit to get back $65 per month, or $20 for part-time scholars. And don't forget that tuition fees and education credits your child doesn't need can be used to reduce your tax load too.
If you are caring for a sick or elderly parent, grandparent, or other disabled dependant over 18, the Caregiver Tax Credit is there for you. As long as your dependant's net claim is less than $18,081, and your maximum claim amount of $4,095 for each dependant meets requirements, you'll be able to qualify. These numbers change so check with the CRA if you have questions.
The mud room roof leaked, your kitchen counter needed an upgrade, and it was time to spring for central air. Good news! Because you hired a contractor between January 27, 2009 and February 1, 2010, you may be eligible for a Home Renovation Tax Credit. At the time of this book's publication, the credit is only available for the 2009 tax year and applies to eligible expenditures of more than $1,000, but not more than $10,000. The resulting maximum tax credit equals $1,350.
So what are some examples of eligible expenses?
Windows and doors
New carpet or hardwood floors
New furnace, boiler, wood stove, fireplace, water softener, water heater, or oil tank
Permanent home ventilation systems
Central air conditioner
Permanent reverse osmosis systems
Septic systems
Wells
Electrical wiring in the home (e.g., changing from 100 amp to 200 amp service)
Solar panels and solar panel trackers
Painting the interior or exterior of a house
Building an addition, garage, deck, garden/storage shed, or fence
Re-shingling a roof
Building a new driveway or resurfacing a driveway
Permanent swimming pools (in-ground and above ground)
Permanent hot tub and installation costs
That's right. Hot tubs. (For a longer list of eligible expenses, visit the CRA's Home Renovation Tax Credit website at Cra-arc.gc.ca/hrtc.)
So are there any housing-related expenses that are not eligible? Yes. Ongoing maintenance fees for services such as snow removal, lawn care, pool cleaning, and monthly security bills are not included. You can't claim carpet cleaning or window washing either. And your housecleaner? You might consider her a permanent fixture in your life, but sorry. The government isn't going to pick up the tab.
Caution: make sure that the person you hired to do your renovations is legit (i.e., wasn't expecting you to pay in cash under the table), or you won't have the files and invoices needed to make a claim. In addition, if you hired Uncle Larry to install new windows, the work is ineligible unless it meets all other requirements and you can prove he is registered for the goods and services tax/harmonized sales tax under the Excise Tax Act.
And don't forget the ecoENERGY Retrofit program that provides homes and properties up to $5,000 for energy improvements. Go green, save green. Visit Ecoaction.gc.ca for more information.
Did you buy your first house in 2009 or do you plan to in subsequent years? First-time homebuyers, and those who have not owned or lived in another home for the four preceding years, can take advantage of the Home Buyers' Tax Credit (HBTC), a non-refundable tax credit, as long as their closing date for the qualifying home was after January 27, 2009. The HBTC—meant to help with closing costs such as legal fees and property transfer taxes—is calculated by multiplying the lowest personal income tax rate for the year by $5,000. For example, because the lowest rate was 15 percent in 2009, the credit that year is $750.
If you have a disability or are buying a home for a relative with a disability, you do not have to be a first-time homebuyer. Remember, though, that you must be buying the house or condo to have a more accessible living space, or because it makes it easier to care for the person with the disability.
Packing, sorting, and hauling boxes out to the truck. Moving is time-consuming and stressful, but at least you can count on some major tax breaks for your trouble. If you relocated at least 40 km to start a new job or business, you can deduct storage, transportation, and even the costs associated with cancelling and old lease. What you can't write off: any losses from the sale of your old home or the cost for moving a mobile home. (But if you have furniture in it when it's being moved, you can write off what it would have cost you to move it by going the U-Haul route. Go figure.)
Next time you're standing on a packed subway platform with a thousand other commuters, take a deep breath (just not too deep) and remember you can claim your monthly public-transit pass on your tax return. Keep your receipt when you buy a monthly (or longer-duration) pass for subways, busses, streetcars, commuter trains (including VIA, as long as you hop the train to get to work), and even local ferries, and you can deduct the cost of your commute and receive money back.
When was the last time you claimed a medical expense? Never? According to some experts, not claiming medical expenses is the number-one tax break we miss out on. Maybe you never bothered to make a claim because the minimum required is quite steep (the total amount of receipts must exceed $1,844 or three percent of net income, whichever is less) or you assumed your prescriptions for eyeglasses wouldn't count. But what you might not realize is how many medical expenses are on the CRA list. Think ambulance rides, contact lenses, laser eye surgery, hearing aids, orthopaedic shoes, a breast prosthesis, pacemakers, and tutoring services for someone with a learning disability. Even an air conditioner—so long as it's for a patient with a severe chronic ailment, disease, or disorder—makes the cut.
You can claim any expenses that weren't eligible under or paid out by your company's benefit plan, providing you have a prescription. For example, your plan covers $300 for physical therapy per annum, but you spent $1,500 after a skiing accident last winter. You can deduct the remaining $1,200 you spent on treatments.
Plus, all the fees you paid into health and dental premiums last year may be claimed.
Still don't think you qualify? Keep in mind that you can claim expenses in any 12-month period ending in the tax year you're filing in—July 2008 to June 2009, for instance—so maximize the credit and pick a time when those expenses added up.
He gave $100 to his boss so she could run for the cure. You wrote a $150 cheque to help disadvantaged kids go to camp. This year, pool your charitable donation receipts and claim them on one return to enjoy a bigger tax break. The first $200 you claim grants you a 15.5 percent tax credit, but everything after that racks up 29 percent.
Your dollhouse decorating hobby earns you a tidy little sum each year. Guess what? Even if you toil as a corporate executive during the day, that sideline hobby is a business—and you can use it to write off a huge array of expenses including house mortgage insurance, utilities, and property taxes. Just be sure you have proof that you at least intend to sell your wares, whether that means holding onto a receipt for your online ad banner or keeping sales letters you sent by email.
Don't forget to pay the kids or a lower-earning spouse a salary for stuffing envelopes, answering phones, or maintaining your little company's website. You can deduct that salary against your income, save on taxes, and still keep the money in the family.
Let's pretend the end of February is in sight. With the cut-off date for contributing to your RRSPs approaching, what are you doing to prepare?
Scrambling like a mad woman to gather funds and take out an RRSP loan.
Sitting in the Florida sunshine and relaxing. You have a plan that automatically invests money in your RRSP each month. Who's worrying?
Nothing. No money. No time.
It's amazing how many otherwise smart, savvy women wait until the last minute to invest or forgo investing in Registered Retirement Savings Plans at all. After all, the government is practically paying you to save your money and take control of your future!
As we mentioned before, an RRSP isn't an investment, per se, but a way to register your investments that shelters your money from taxes and allows those funds to grow tax-free until you withdraw them upon retirement. And don't forget the tax deduction. Depending on your tax bracket, you can save up to 40 percent on your taxes through your contribution. So, a $1,000 contribution to your RRSP can reduce your tax bill by up to $400.
What's not to love?
Virtually any and all investments can be housed under the RRSP umbrella today. That's the good news. There are a few words of caution we need to mention, however, since some investment vehicles make better financial sense than others. For instance, stay away from annuities. They allow investment dollars to compound without being taxed—but isn't that what your RRSP does already? Why bother double-dipping in the same water hole? Besides, annuities carry higher annual operating expenses and reduce your earnings. Limited partnerships are a bad bet too for many of the same reasons, plus it's often tough to get your money out of them come retirement.
So what sort of investments should you place under your RRSP umbrella? Again, that depends on how much risk you're willing and able to take, your investing personality, the current economy, and when you need the cash. Here's a short chart outlining some popular choices, their level of risk, and whether they make it easy to get your money out when you need it.
RRSP investment type | Level of risk | Easy to liquidate? |
|---|---|---|
Savings account | Low | Yes |
Money market funds | Low | Yes |
GICs and term deposits | Low | No |
Canada Savings Bonds | Low | Yes |
Mortgage funds | Medium | Yes |
Mortgages | Medium | Not always |
Bonds | Medium | Not always |
Balanced funds | Medium | Yes |
Stocks (Cdn. and foreign) | Medium/High | Yes |
Precious metals funds | Medium/High | Yes |
Remember, although some of these options look like a good bet—they're less risky and their liquidity can't be beat—they can make for poor RRSP choices because their earnings are far too low. Some of them, such as savings accounts and money market funds, don't even keep up with inflation! Meanwhile, balanced mutual funds—particularly no-load funds that avoid paying costly commissions—offer a good middle-of-the-road option for those who want to diversify and who feel comfortable taking on some risk. Again, the younger you are and the longer time horizon you have, the more risk you can shoulder with a portfolio strong with equity (i.e., stocks or shares of a company, precious metals funds).
Whichever option you choose to invest in, there are a few RRSP rules that will help make the process easier and more lucrative in the long term.
Yes, we're back at the main tenet of financial planning—make sure you put money aside for savings every month. That way, when RRSP season rolls around, you won't be clambering to find money to put away. Set up an automatic transfer to your RRSP on a monthly basis—whether it's $50 or $500, every little bit helps!
If you can, try to maximize your contribution—the limit for 2009 is the lesser of either 18 percent of your earned income or $21,000. Want to know what this year's contribution limit is? Check last year's notice of assessment—it's written there in black and white—or contact the CRA.
If you don't max out your RRSP contribution this year, then the "deduction room" is carried forward to future years. Assume a taxpayer makes a contribution of $10,000 for 2009, even though her contribution limit is $21,000. The unused deduction "room" of $11,000 can be carried forward indefinitely and added to the calculation of the next year's deduction limit.
No matter how tough times get, try not to dip into your RRSP savings. Not only will you probably pay whopping penalties, but when you withdraw that money, 100 percent of it will be taxable today. Ouch! Instead, focus on building up a reserve of cash in your portfolio to help you out on a rainy day. Ideally, it would be great to have enough to replace your income, if necessary, for at least six months, but three months is a good starting point.
If you run your own businesses or work solo as a freelancer, buckle up—because you can enjoy even more tax reduction perks. But you'll also face more headaches: keeping track of receipts for printer toner, raw materials costs, coffee with clients, gas, and car maintenance fees. (The upside? You can write most of these off.) You, more than anyone else, must have some tax receipt system.
And here's one more piece of advice: look at all of your receipts each and every week, and write down—either on the receipt itself or by using personal finance software—what they were for. Waiting weeks or months later to do this job is a nightmare. Also, ensure the receipts show what they're for, as well as having a legible vendor's name and date.
But what makes a business expense legit? That's easy. In order to determine if something is truly a tax-busting business expense, ask yourself: "Would I have bought this particular item if I wasn't in business?" Of course some expenses fall into a grey area. A freelance writer and copyeditor would certainly buy pens and pencils for home use, but she also needs them for work. If you're really worried about being audited, save receipts for home pens and work pens. If you get audited about your footloose-and-fancy-free pen buying ways, you'll have proof you're only writing off those used in the office.
Here is a short list of business write-offs you'll want to consider in April or by June 15, when businesses must file their tax returns:
Belong to a professional association? Write off your annual membership dues.
Interest you pay toward loans to run your business are tax deductable. For more information on this tax deduction, see the "Interest" section of the CRA's Business and Professional Income guide.
Deduct the premiums you pay for insurance on buildings, machinery, or equipment you use to run your business.
Don't forget bank fees. That $120 a year you pay just to have a chequing account is tax deductable.
Surprise; supplies! Those pens, paper, paper clips, staplers, and sticky-notes can really add up over the course of a year. If you're a photographer working with old-school film, write the rolls off. If you're a vet, animal drug expenses can reduce your taxes too.
Deadbeat clients get written off in more ways than one. If someone hasn't paid you in the previous year, state that on your tax forms as a business expense.
Legal and accounting services are tax deductable.
Entertainment. Did you pay for tickets to send a favourite client to a hockey game? Or maybe you just picked up the cheque at a business lunch. As long as these expenses were work related, they're included and you can write off 50 percent of the cost. Just remember to keep your receipts.
Business gifts. Last December you sent all of your favourite clients gift cards to thank them for their business. That's a write-off.
Your home is your castle—and it can reap serious tax savings:
A portion of your mortgage or rent. Let's say you own an eight-room home, for example, and two rooms are used for your business. You can write off 25 percent of your home's mortgage, rent and maintenance costs such as heat, electricity, or water, and even some cleaning supplies and toilet paper (everyone takes bathroom breaks during the workday, no?). Don't forget house insurance, either.
Repairs done around the home where you conduct your business. That doesn't mean you can remodel your kitchen and call it a business expense—unless you're a recipe tester and the current kitchen is unusable—but if your home office needs a new coat of paint, slap it on and write it off.
Technology used for your business. You can write off at least a portion of your Internet fees (chances are you're doing non-work related surfing too) and other software.
Travel expenses. If you travel for your business, you can deduct travel costs including oil, licence and even registration fees. Keep a journal in your car and use it to write down mileage and gas usage when you hit the road to see a client. Don't forget parking meter fees as well.
Miss the tax deadline? Here's what you pay: If you file after April 30, tack on an extra five percent of your outstanding balance to your total. So if you owe $5,000, that's a whopping $250—even if you file the very next day, May 1.
And don't forget other costly penalties. If your Canadian income tax is in arrears, the Canada Revenue Agency will also whop you with a penalty equalling one percent of the balance owing for each full month that your return is late, to a maximum of 12 months. And that's only if you haven't been charged a late-filing penalty in the previous three years. Repeat offenders can be expected to cough up 10 percent of the balance owing for the current year and two percent of the balance owing for each full month the current income-tax return is late—to a maximum of 20 months.
Sometimes, however, life gets in the way and doing taxes runs a distant third or fourth place on a person's priority list. While you'll never be able to negotiate the amount of tax you owe the government, some situations warrant flexibility when it comes to figuring out interest and penalties.
If there has been a serious illness or death in the family, if you've lost your job, if there was a fire at your house, or if you experienced other circumstances beyond your control, you may be able to get the CRA to reduce or cancel the penalties you would normally owe due to late filing. The agency may even set up extended filing deadlines or a payment plan to take some of the stress off you.
No matter what the reason for filing a late tax return, you have options. Call the Canada Revenue Agency at 1-800-959-8281 and talk to an agent. Plead your case. If you take the time to connect, you and the agent can work out a repayment plan. Visit the CRA website to find the "Request for Taxpayer Relief" form RC4288.
Having an audit notice land on the doorstep is enough to make even the most cool and collected taxpayer raise her face to the heavens and wail, "Why me?"
Breathe.
Getting audited is usually not the nightmare you would expect it to be.
Perhaps the problem with the auditing process is that it makes people feel they're being accused of a crime or trying to beat the system. In reality, if you've made this year's audit list, there's a good chance you're there simply because you've been randomly selected. Random audits help the CRA find common areas where mistakes are made. Or perhaps your file came up in someone else's audit. And some people are simply more likely to be audited than others, such as the self-employed, salespeople, or anyone else who is often paid a portion of their earnings in cash.
Of course sometimes an audit is booked when agents notice inconsistencies in your forms, you've claimed abnormally large deductions compared to other years, or someone has tipped off the government that you're evading taxes. (Think disgruntled employee or ex-spouse.)
Whatever you do, though, don't ignore the audit request letter. Preparing for an audit isn't so bad, especially if you have kept receipts and notes for the past six years in a convenient location.
Here's something else you might not have realized: if you're audited, the CRA informs you which portions of your tax return it wants to scrutinize. You're not going to be asked to pull out years and years of documents and paper piles. Trust us. They have no interest in wading through all of that stuff either. So when it comes time to talk to your auditor, remember to discuss only the portions of the return he or she wants to see. Now is not the time to get nervous and start blabbing about other items not on the table—or you'll run the risk of opening a whole new Pandora's Box.
If you hired a tax professional, such as a certified general accountant, to prepare your original tax documents, you'll probably ask that person to represent you during the audit process. Not only has she been through this before with other clients, she'll be able to talk the talk with the auditor. Even though you'll be paying her for the service, she'll probably save you prep time, stress, and money. (Because don't forget, the auditor's job is to find more money for the CRA.)
That being said, remember that an auditor is a person just doing his or her job. So treat them with respect even if you're not fond of what they have to say. Don't argue; state your case and move on. If you feel you've been bamboozled, there are plenty of bureaucratic layers of government folks to plead your case to. You can even take your case to court if all else fails.
File on time.
Use a tax specialist or computer software so you don't make math errors.
Declare all of your income.
If you run a business, don't declare losses year over year. At some point you should start to make money.
Send your tax forms by snail mail (some accountants swear by this).
Declare all income, especially if you're self-employed.
Be honest, but don't be afraid of deductions because you're worried about being audited. If you have questions or doubts about a write-off, call CRA or an accountant and ask.
Speaking of getting personal, here's a tax tip you've probably never considered: tell your story. Most tax filers assume they have to stick to the forms the government gives them. That's true up to a point. But you can also send along anything else if you think it will give the CRA agents a better picture of your finances. (This works best if you're submitting by snail mail.) And yes, that includes typing out a simple document outlining where your money went.
Maybe you're self-employed and had a baby last year so your earnings fell dramatically, but you still had to pay your business's telephone bills, utilities, and rent. Explain that. Or you've always given large amounts to charity in the past, but this year you had to hold back and plan to pool your charitable contributions with next year's numbers. Explain that too. By writing down your story clearly without a lot of fanfare, you look like you have nothing to hide.
Alright, you're still not exactly excited about filing taxes, but now that you see the tax process is hardly intimidating, let's keep moving along.
Speaking of which, in the next chapter you're about to discover home buying, selling, and owning secrets that will save you money, make you money, and put you on the path to living in your dream home sooner than you ever thought possible. Ready?