Episode #51: The Beginner's Guide To Filing Your Taxes In Canada
Doing your taxes does not have to be so mysterious and scary. If it feels that way to you then that’s probably because no one ever took the time to teach you this skill, so don’t be so freaking hard on yourself! To make things as easy as possible for you, today we’re going to be starting with the basics in this beginner’s guide to taxes in Canada.
So I struggled with how to format this episode because there are so many tax topics to cover but I really didn’t want to scare you away by making things complicated or throwing in a bunch of that finance jargon that I know we all hate. After drafting and redrafting this lesson I’ve settled on a very beginner friendly overview of our tax system where we will cover:
When you need to start filing taxes in Canada
What you need to file your taxes
The different ways you can file your taxes
An explanation of tax brackets
And an explanation of tax credits and deductions aka things you can use that allow you to legally pay less tax, which is always everybody’s favourite part because who wants to pay less tax than they need to.
When Do You Need To Start Filing Taxes In Canada?
There is no specific age requirement for filing taxes in Canada. The general rule is that as soon as you start earning income you should start to file a tax return. What this means is that if you’re a student who has started a side hustle and earned a few thousand dollars, then it’s time to start filing a tax return.
Even if you’re an adult who is not earning any income then it’s still a good idea to file a tax return, because you could be missing out on benefits that you could be earning from the government like the GST/HST credit, or the Ontario Trillium Benefit.
There are a few misconceptions about Canadian citizenship and where you’re living in regard to whether or not you need to file a Canadian Income Tax Return. If you’re living in Canada, but you made money from your company that operates in another country, you still need to file a return in Canada. Conversely, if you moved to another country, but are earning income from a business you have in Canada, then you also still need to file a Canadian tax return.
Chances are, if you’re finding yourself tuning into this lesson, then you should be filing an income tax return. Don’t freak out because there are a tonne of benefits to filing a tax return, like starting to accrue space in an RRSP account, and I’m going to walk you through how to actually go about filing your taxes in today’s lesson.
How To Actually File Your Taxes
While it may seem intimidating to file taxes, don’t be scared, it’s actually a really straightforward process to get started with and I’m going to share the exact steps with you here. Also you’ve probably been scared into thinking bad things will happen if you mess up your taxes because of the news and information that we hear out of the states. I promise you that our taxes are way less scary here in canada. They don’t cart you off for tax evasion here or come knocking down your door if you make a mistake on your tax return. As long as you’re not engaging in any sort of high level tax evading ponzi scheme or money laundering, then you’re gonna be fine.
Step 1: Gather Your Tax Forms
First, you’re going to want to gather up your tax forms. These are forms that the government mails you that are named things like T4, and T4A. These forms are used to disclose the income you earned that year, whether that’s employment income, income from scholarships or bursaries, income from investments or interest, most of the time these forms will be sent to you, but sometimes you might have to look some up and find them online as places are moving more to online documents like some banks or educational institutions. For example I have to go online and retrieve a T5 form from my account at EQ bank to declare the interest I earned from my high interest savings account there.
You should expect to receive most of these forms in the mail or have them made available online sometime around February, so you can start collecting them in time to file your taxes by the end of April.
Step 2: Organize Your Deductions and Credits
Second, you’re going to want to look into and organize what deductions and credits that might be available to you to pay less tax. This applies to everyone, no matter if you’re self employed or traditionally employed.
If you’re self-employed then there are expenses you can deduct from your income to lower your taxable income, these are expenses you needed in order to run your business. What a lot of people don’t know though is that even if you’re not self employed there are a variety of deductions available for you to also use to reduce the amount of tax you need to pay.
I’m not going to dive into what these are right now, but if you want to learn more about some of these deductions that you might be eligible for I’ll be releasing a lesson all about them next week, so make sure you subscribe to the channel and also join our mailing list if you want to know when that episode goes live, you’ll find a form to join the mailing list in the description for this episode.
Step 3: Decide How You’re Going To File Your Taxes
Third, you’re going to want to decide how you’re actually going to file your taxes. This means deciding what method you’re going to use to get your tax information to the CRA so that they can process your tax return. There are a few different options for how you can do this, choose the option that best fits your needs, and feel free to try out different things each year so you can see what system suits you best.
First, the most common way that most people now know to file their taxes is to file them electronically online through a certified tax software like Turbotax. When you use this option, you complete your tax return yourself online, and depending on the software you choose there are often prompts and questions and information for you along the way that will help you do a pretty good job of it all. You can find a list of certified tax software on the CRA website, options exist at a variety of different budgets and some of them are even free. This is a really good option if you’re traditionally employed and your tax situation is relatively easy.
The second way to file your taxes is to use an accountant. This is a trained representative who you authorize to file your taxes for you. With a good accountant you send them all the information you gathered in steps 1 and 2, they prepare your tax return for you and sometimes follow up with a few questions, you sign off on it and they send it in to the CRA. An accountant is a really great option to choose if your taxes are more complicated, for example if you’re self employed, because accountants understand exactly how the tax system works and can often end up saving you a lot of money in taxes that you might otherwise pay by just not understanding and missing things. I use an accountant to file taxes for my businesses and it’s so worth the money because a) I know they’re doing things right and b) they save me more money in taxes than I pay them for the service compared to when I just filed my taxes online myself, so it’s a win win. If you’re at all nervous about your taxes, or if your tax situation is slightly more complicated than just getting a T4 slip from your employer, then an accountant is a really good way to go.
After you’ve chosen how to file your taxes, you need to provide all the information you gathered in steps 1 and 2 and use them to file with whatever method you’ve chosen that we just talked about. You need to make sure you’ve filed and paid your taxes by April 30th.
Once you’ve filed your taxes, you will receive a piece of paper from the CRA called an NOA which stands for notice of assessment. This is confirmation that your tax return has been successfully filed, and it provides you with any important information you need regarding what to do next, for example if you owe any more tax than what you’ve already paid, and how much contribution room you now have available in your RRSP account.
How The Canadian Tax System Works
Our tax system is what’s known as a progressive tax system. This means that the more money you make, the more tax you pay based on something called income tax brackets.
Income tax brackets are the percentage of tax that you pay based on how much income you’ve earned. You’ll see the income tax brackets for this year below. It’s important to know that in Canada we pay federal taxes, as well as provincial taxes. The federal taxes are the same across the country, and the provincial taxes vary slightly based on what province you live in.
As you earn more income, you’ll move into higher tax brackets BUT this doesn’t mean that you’ll start paying more tax on all the money that you earned. Instead what happens when you make more money you’ll only pay more tax on the portion of income that tipped you over into the higher tax bracket. This means that it’s always advantageous for you to earn more money, because even though you will have a higher tax bill, your after tax income will still be higher. If you want to see a clear example of this please refer to the corresponding youtube video for this episode to see a visual example of how the tax bracket system works.
How Different Types of Income are Taxed Differently
There are different ways that you can earn income, and it’s important to note that traditional employment income is taxed higher than anything else. This means that if a traditional job is your only form of income then you’re paying the highest taxes of all. If you’re scratching your head not knowing what I’m talking about, or feeling indignant to learn this, let’s talk about other forms of income that you can have.
First, there’s self employment income. If you start a business you can run it as either a sole proprietorship or as a corporation. Corporations are taxed at an extremely low rate here in Canada, so the income that your corporation makes pays way less than employment income. If you’re a sole proprietor then you get to use tax deductions to lower your taxable income. This means if you make $120,000.00 you can write off business expenses from your $120,000.00 to tell the CRA that you earned less than that, and they will only tax you on that lesser amount. Some of these expenses are things that you will have to spend money on specifically for your business, for example hosting a website, so you actually don’t have that money available for your life, but there are also a lot of other life expenses that cross over as business expenses that you can write off to lower your income. For example you can write off portions of car insurance premiums, cell phone bills, a percentage of your rent or mortgage interest if you’re working from a home office, and things like that.
So, let’s say you made $120,000.00 from your business, and by using write offs, some of which are life expenses that you’d have anyways, you can lower your taxable income down to $97,000.00. This means that you move from the 26% tax bracket back down to the 20.5% tax bracket. You now pay less tax than someone who earned $120,000.00 from their job, and had some of the same life expenses as you but couldn’t write them off.
You can also earn income from investments, which are taxed very favorably. Income from investments is called ‘capital gains’ and capital gains tax is low. If you take capital gains out of your investment account to pay for your life, you’re only going to be taxed on 50% of those capital gains. That doesn’t mean you’re going to pay 50% tax. It means for example let’s say you pay yourself $50,000 in capital gains in a year, you’re only going to be asked to pay tax on half of that, so on $25,000.00. That $25,000.00 is just added to your regular income and you’re taxed according to the income tax brackets that I talked about earlier.
All of this is to say that if you can diversify the forms of income that you have beyond just income from your employer, you will start to get ahead financially simply by not having to pay as much tax as someone who earns the same amount as you, purely from their employer.
How To Use Tax Credits and Tax Deductions To Pay Less Tax
Tax credits are different from tax deductions, although both can be used to the same effect to pay less tax. While tax deductions lower your taxable income, tax credits lower the amount of tax that you actually owe.
When the government says you owe $1,000.00 in taxes, you can use tax credits to reduce that $1,000.00 directly. There are two types of tax credits, refundable and non refundable.
Refundable tax credits work to lower your tax bill, and if you lower it below $0.00 then you will get a tax refund from the government. So if you have a $1,000.00 tax bill, but have $2,000.00 worth of refundable tax credits, then you get $1,000.00 back from the government. An example of this is the GST/HST tax credit.
A non-refundable tax credit can be used to lower your tax bill to $0.00, but doesn’t go any further than that. An example is donations. If you have a tax bill of $1,000.00 but you have a donation tax credit for $2,000.00, you can lower your tax bill to zero, but you don’t get any money back after that.
Tax credits of some sort are available to everyone, and aren’t just limited to self employed people like many people think because of the way that tax deductions work. So, if you’re earning traditional income from an employer, make sure to check out tax credits to see what you might be eligible to use to lower your tax bill.
I hope this beginner’s guide wasn’t too dense. I tried to stick to the basics of when you need to file taxes, what you need to file taxes, how to file them, how income tax and tax brackets work, as well as tax deductions and credits and how they can be used to lower the amount of tax that you have to pay. If it seems like a lot of information please don’t worry about it! It is a lot especially if this is your first time hearing most of this. I recommend saving this episode and watching it again with a pen and paper so you can take notes. Maybe even watch it with a friend or family member so you can talk about it after and solidify the things that you learned today.
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