ABC's of income tax

Preparing your income tax may not be as simple as ABC, but understanding the fundamental principles is not as difficult as you might think. Let's get down to basics and clear up a few misconceptions:

• Many people focus on their income tax only in April. However, tax planning is a year-round process. Although April is the deadline for filing individual tax returns, it is too late by then to look for ways to reduce the amount you owe. If you make tax planning part of your everyday life you'll reap the benefits in April.
• Think in terms of after-tax dollars, instead of gross income. As a result you'll work with money you actually have to spend and become more aware of how much you lose to taxes. To calculate after-tax dollars, use an estimated average tax rate based on your last tax return. Average tax, expressed as a percentage, is the total amount of tax you paid divided by your total gross income, multiplied by 100. For example, if your gross income was $30,000 and you paid $5,100 in taxes last year, your average tax rate would be ($5,100/30,000 * 100) or 17 per cent, which means that roughly 17 cents of every dollar goes to taxes.
• Written proof for each claim is an important tax basic. Collect receipts and other documentation throughout the year to be prepared for all allowable claims. You are not off the "paper" hook once you've sent in your tax return. Although Canada Revenue Agency (CRA) usually assesses claims within months of filing, you are required to keep returns and related papers for at least six years.
• You have to include income whether or not you get a T4 or T5 slip. Technology makes it easy for CRA to match employees and employers through the T4 and T5 forms filed by businesses. If you fail to list all your income, you may have additional tax to pay, plus interest compounded daily from April 30 and possibly other penalties. One step towards keeping more of your income is learning how to take advantage of available tax reduction opportunities. You may need to seek professional advice to implement specific tax strategies.
• Tax deductions, such as union or professional dues and contributions to registered retirement savings plans (RRSPs), reduce taxable income. Deductions tend to favour those in higher tax brackets.
• Tax credits benefit all tax brackets equally. Credits like charitable donations or property tax credits reduce the amount of tax payable.
• Tax exemptions allow you to make tax-free profit or tax-free capital gain. Home ownership becomes attractive, since any profit made on the sale of your home or principal residence is tax-free.
• Consider CRA a resource, not an enemy. Phone in your questions (1-800-668-7622), visit a local office, attend a community seminar or check out their website. Although CRA officials cannot give you financial planning advice, they can help you understand how specific tax issues apply to your situation. Ask for a copy of the information bulletin or tax form relevant to your questions so you'll be sure to understand the details.
• File a return, even if you owe no tax. Build up RRSP contribution room. You may need it in a more profitable year.
• File your return on time. Even if you do not have enough to pay what you owe, if it's postmarked no later than April 30, or filed electronically by the end of that day, you will avoid late-filing penalties. If you don't file on time, CRA will charge you a late-filing charge of 5 per cent of any outstanding taxes you owe as of the April 30 deadline. In addition, you will be charged 1 per cent on your outstanding balance for every month your return is late - up to a maximum of 12 months. However you will still owe interest on the balance. Call to find out what Canada Post Offices will stay open on April 30. Some local CRA offices will be open late to accept returns.

If you wish to discuss other tax planning ideas based on your situation, please call our office to set up an appointment.