Tax Tips From Debt Experts

Filing your annual income tax return might feel like a financial win if you’re expecting a refund, but for many Canadians filing can be a source of stress, especially if you have a balance owing on your tax return that you’ll struggle to repay.

Read on to get debt expert tips on minimizing your income tax filing stress, common causes of tax debt, and where you can safely get confidential, qualified advice on how to deal with unpaid tax debt.

Canadian Tax Return Filing Tips 

Know the Tax Filing Rules

Every year Canada Revenue Agency (“CRA”) makes changes to tax brackets and tax credits. Before you start filing your return, spend a few minutes finding out what’s changed – knowing the ins and outs could get you some extra money.

• This is especially worthwhile if you’ve had a financial change (like a new job where you need to supply your own tools, or if you’ve had a change in dependants).
• Don’t try to “outsmart” the system by making claims that are uncertain, or that you don’t have proof of. Audits can and do happen!
• Be wary of write-offs that seem too good to be true – they probably are. Charitable donation schemes for example, have left many taxpayers with a large bill on their hands. If you’re unsure, ask a reputable, qualified professional first.

File Your Tax Return on Time

There are very few circumstances where an individual isn’t required to file an income tax return – and in nearly every case it’s in your best interests to file, even if you don’t owe any money.

CRA doesn’t take kindly to Canadians who don’t file their tax returns and CRA has been known to issue ‘arbitrary’ assessments with big balances owing to prompt ‘non-filers’ into getting their tax returns done.

• For most Canadians the deadline to file your annual tax return is April 30
  • If you owe money, you’ll also need to pay your balance by this time
• If you’re self-employed, the date you usually need to file your tax return by is June 15 – but you still need to pay by April 30 generally

If you owe money for income taxes and your return is filed late, CRA charges a late-filing penalty. If you’re unable to pay the balance you owe by the payment deadline, you can at least avoid these penalties by filing your tax return on time.

Don’t stop filing tax returns because you think you’ll be adding to an existing balance owing with CRA. Not filing tax returns for a long period of time can trigger other issues, and you may miss out on additional benefits you’re entitled to.

• Having unfiled returns can also create challenges for you in situations where you need to prove your income, such as applying for credit or housing.
• Allowing your income tax returns to pile up year after year isn’t likely to help you in the long run, and eventually it will likely result in stress and lost sleep down the road.

Ask for help filing your tax return if you feel it’s beyond your skill-set:

• If your return is basic and consists of a T4 or two, chances are you could file it yourself without missing out on credits.
• For individuals who are self-employed or have more complex finances, it’s a good idea to have a reputable bookkeeper or accountant check over your return to make sure you’re getting all the benefits you may be entitled to.

Be Balance Smart If You’re Getting a Tax Refund

Plan to use your tax refund well if you’re getting money back. Remember, it’s not really free money – it means the government was ‘holding’ money from your income that you overpaid to them throughout the year. Consider how the refund could benefit you the most, and if you decide to ‘splurge’ with the cash, be sure you only do so once. Some good options to consider for an unexpected tax refund include:

• Making an extra payment towards your debt
• Contributing to your savings or RRSP accounts

Pay What You Owe and Plan Ahead for Future Filings

When you owe money for income taxes make sure you pay your balance owing in full, and on time. Interest for tax debt compounds daily, so even a modest amount can snowball very quickly.

Look at why there is a balance owing and try to correct this and plan ahead as you go forward.

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Common Causes of Income Tax Debt

To avoid having a balance owing next year at tax time, it’s critical to understand what caused the balance. Some common causes include the following:

Cashing in RRSPs

One of the benefits to investing in RRSPs is that you are allowed to deduct the amounts invested from your income, which often means that you’ll get a tax refund in the year you contribute. When you withdraw money from your RRSPs, however, these funds need to be added to your income, which can trigger a balance owing.

• A baseline level of income tax is often withheld by the financial institution and the rate of tax withheld can vary based on how much you’re cashing in.
• The problem here is that the tax deductions upon withdrawal may not always be enough to cover what you owe at your tax bracket – you may need to pay more tax on the withdrawal when you file your income tax return for the year.
  • This can mean that the amount of money you thought you had available from your after-tax RRSP withdrawal is significantly lower than you had predicted. 

If you’re cashing in an RRSP, be sure to set some of that money aside in case you need it at tax time.

Working Multiple Jobs

For standard employee jobs (i.e. T4 income) your employer typically deducts an estimate of your taxes owing based on your anticipated income throughout the year – the goal is that you have neither a refund nor a balance owing upon filing your tax return. The thing to note here is that when your employer is calculating your payroll deductions, they’re normally doing so assuming that the income tax rate is based on those earnings alone.

• For someone working multiple jobs it’s common to find that the taxes deducted at each job are not sufficient to pay the combined tax bill from the multiple income sources. This can also happen if you receive Employment Insurance (“EI”) benefits in the same year you earn employment income.
• As your earnings increase, a greater percentage of your salary needs to be paid into taxes. If each employer is deducting tax based on a salary of X, and your actual total income ends up at 1.5-2X, it’s almost certain you’ll have a tax balance owing for that year.
  • If you work more than one job, consider asking one employer to withhold extra tax going forward.
  • EI benefits frequently don’t have sufficient tax withheld. Try to stay ahead by asking an employer to take a bit more tax off your paycheques or making an instalment payment to CRA during the year. 

Being Self-Employed

In Canada it’s remarkably easy to become self-employed – unfortunately there’s no required ‘crash course’ in small business tax compliance, which often means that business owners learn by trial and error that the government requires compliance regardless of whether an individual knows the tax rules or not.

When you’re self-employed, there is nobody remitting CPP, EI, and income tax payments on your behalf. For all income that you earn, you’re required to calculate and remit these payments to CRA.

• Get into the habit of making regular instalments throughout the year to avoid a big tax bill hitting all at once. You can use free online calculators to estimate how much you should be putting aside.
• If you normally have to pay a lump sum to CRA, you may be required by CRA to make instalment payments throughout the year (i.e. monthly portions of your annual tax bill). Interest will be charged if you miss one of these required instalments.
• Avoid the impulse to postpone making remittances to CRA if money is tight, the government has powerful collection methods.

(Collecting but) Not Remitting GST

Many self-employed individuals are required to step into CRA’s shoes and become a tax collector and remitter of GST payments.

• Self-employed individuals earning more than $30,000 in revenue each year are required to register with CRA and obtain a GST number to file GST returns and make remittances.
  • There is only a very small number of professions where this is not required – in most cases, GST will be assessed against a self-employed person based on their sales, even if they failed to collect GST from customers. It’s important to know the requirements and to satisfy them from the start.
• Many business owners find themselves in hot water because they miss GST filing deadlines, or don’t have the money available to remit to CRA from the GST they collected.
  • GST charged and collected by a business is considered a “trust” amount, meaning that you are holding the money in trust for CRA. 

Avoid the temptation to use GST collected in the business if funds are tight, CRA is quick to employ aggressive collection tactics on this debt. 

What Can You Do if You Owe the Government Money and Can’t Pay?

In Canada there is a single method of negotiating down a balance owing to the government – filing a Consumer Proposal with the help of a Licensed Insolvency Trustee:

• A Consumer Proposal can effectively write-off virtually all debts including government debts (taxes, student loans, and more) as well as general consumer debts such as credit cards and payday loans. A Consumer Proposal can:
  • Cut consolidated debts by up to 70-80% with no interest or added fees
  • Stop collection action, including a bank account freeze and even a wage garnishment

Filing bankruptcy can also give you forgiveness for consumer and government debts, in the event that your situation makes even a portion of your debt repayment impossible.

If you’re unable to pay off your income tax balance in full or your CRA balance owing has compounded over time, connect with a Licensed Insolvency Trustee as soon as possible. We can help you deal with the debt before it escalates further.

Get your financial fresh start today – book your free debt consultation to talk confidentially with a local Sands & Associates debt expert. We’re here to help you understand your options and choose your best debt solution.