Preparing your tax return probably ranks with having a root canal done at the dentist. However, you may find it less distasteful if you can save some money. As Benjamin Franklin so famously quipped "there are only two things certain in life death and taxes". Here are 10 common mistakes that can result in a higher tax bill.
Mistake 1: Not filing your return on time. You are eventually going to file and that fact won't change. Not filing can cost you, particularly if you are late two years in a row. The first year you are late the penalty is 5% of what you owe plus 1% per month for 12 months plus interest at the current rate charged by Canada Revenue Agency. The second year late costs you 10% of what you owe plus 2% per month for 20 months plus interest on the balance. What does this mean? It means turning a tax bill of $1000.00 into a tax bill of $1500.00 in one year. Ouch!
File your return even if you don't have the money to pay your taxes. Make arrangements with CRA to pay and you will pay interest on the monies owing and not late filing penalties.
Mistake 2: If you are retired and planning to split your company pension with your partner who is in a lower tax bracket, you must file by April 30 in order to take advantage of this provision.
Mistake 3: Not claiming your medical expenses. Medical expenses include glasses, dental, drugs, chiropractor, hearing aids, premiums paid to Blue Cross or similar. There is a deductible (3% of net income). Medical expenses can be claimed by either spouse, and they are claimed on the spouse with the lower income.
Mistake 4: Not reading your Notice of Assessment. (This is the statement you get from the government after you file your return.) There can be gold in the Notice of Assessment. If you don't understand the Notice of Assessment statement, bring it along to your tax preparer or ask someone with some knowledge of taxation what it means. Have them check to see if you have any credits or deductions that were carried forward from prior years. You may be able to utilize these on your current return.
Mistake 5: You are supporting an infirm Canadian relative, or a senior, and if their income is low, you may be able to claim them as a dependent and save tax dollars. They do not necessarily have to be living with you in order for such a claim to be made. Check it out.
Mistake 6: Not claiming a Disability Tax Credit for a taxpayer who has a severe and prolonged ailment that is expected to last at least 12 months. This one is worth big bucks and should be investigated. For any individuals (including children) with a severe disability which interferes with daily living, ask your doctor if they think you might qualify for the Disability Tax Credit. Get a copy of form T2201 and read the instructions.
Mistake 7: Not claiming Moving Expenses. If you have moved more than 40 kilometers closer to your employment in the past year find out whether you are able to claim moving expenses. This can be very lucrative.
Mistake 8: Not claiming your safety deposit box or carrying charges on investments. It may only be a small deduction but over time it can add up to a tidy sum.
Mistake 9: Stop over paying on your taxes. Refunds are very nice but you are giving the government an interest free loan. Use it instead to pay off credit card balances or some other such debt. Ideally at the end of the year you don't owe the government any money and you have no refund. That is proper tax planning.
Mistake 10: Consider holding off deducting your RRSP contributions in a year when your income is low and you expect a higher taxable income in the following year. This will enable you to deduct your RRSP at the higher marginal rate and could put 10% to 20% more in your pocket simply by being patient.
Biography of Ted Krestanowich BSc, PFP, FMA
President of Cambridge Consultants (25 years)
Specialization in taxation, investments
Formerly stock broker with Merrill Lynch Canada
Formerly President of local executive recruitment firm
Former member of Board of Directors and Vice-President – Cambrian Credit Union (9 years)
Graduate of University of Manitoba – BSc (Math / Statistics)
Canadian Securities Course (I & II) –Canadian Securities Institute
Professional Financial Planning course (PFP) – Canadian Securities Institute
Canadian Investment Finance – Canadian Securities Institute
Life Licensing Qualifying course – Investment Funds Institute of Canada
Weath Management Techniques - Canadian Securities Institute
Website: www.cambridgeconsultants.ca
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Great article, Ted. Although I'm not from Canada, the same goes for us Americans. Uncle Sam holds his hand out every year and we had better be ready to 'pay the piper' when the time comes or we end up in hot water.
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