Preparing for tax season can be a daunting task, but with the right approach, it can be manageable and even stress-free. Here are some steps to help you get ready:
1. Gather Your Tax Documents:
This is the first and most important step. In my experience of preparing and filing taxes, most people who don’t do this ahead end up missing out on an important document that can either make them pay more in taxes or receive less in refunds.
For example, failing to report all your earnings from T4s, T5s, T5013, etc., would mean understating your income for the year. When the CRA eventually reassesses your returns, the missing T slips would be included, and your taxes recalculated.
Now imagine thinking you are done with your taxes for the year, only to get a letter from the CRA with a hefty tax bill. Or imagine finding out years later that you could have gotten a refund, or a much higher refund if you claimed some deductions. But you can no longer do that because you don’t remember what they were, can’t find the receipts, or the window to claim those deductions is closed. None of these scenarios sound pretty, so the importance of preparing ahead cannot be overemphasized.
2. Update Your Personal Information:
Ensuring that your personal information is up to date with the Canada Revenue Agency (CRA) is key. This includes your mailing address (physical and electronic), principal place of residence, marital status, and any other relevant details. While the CRA may have access to some of these details from the documents being shared with them through your employers and Service Canada, they are not obliged to update them on your behalf.
Updating your personal information is as simple as logging into CRA My Account and making the changes. Keeping this information current can help you avoid issues at tax time and ensure you receive any benefits or credits you are eligible for.
3. NETFILE or EFILE (Tax Software or a Tax Professional):
The beauty of filing taxes in Canada is that you can simply do it yourself by answering questions curated by your digital software provider. This method is known as NETFILE. To use NETFILE, you simply visit the website of your preferred tax solutions provider, create an account, and answer certain tax-related questions. The answers you provide are then used to generate what your tax position would be.
Most of these solutions offer both free and paid versions, and while they are both effective, it is important to note that the features in the free version are limited. What this means is that someone with a medical or donation credit, rental income, or foreign income, for example, may need to pay for an upgrade to get access to the relevant schedules.
EFILE, on the other hand, is a specialized system used by professionals. To use EFILE, tax professionals need to pass an eligibility and capability test by the CRA, yearly. This test is simply in the form of an application, after which the CRA runs checks on the applicant. First-time applicants would then get a call from a CRA representative before getting an approval or a rejection. In addition to this, the method of preparation is not available for general use online. The system requires the use of dedicated paid software to prepare and file the tax returns. So contrary to NETFILE, the returns are prepared on each applicable schedule and are pretty much more detailed than the online method.
In a nutshell, using online software can save you time and ensure your return is processed quickly. But things get complicated if your returns have a little more detail than the everyday taxpayer. It is therefore advisable to engage the services of a tax professional if your tax situation is complex, as they can provide valuable advice and ensure that your return is done correctly.
4. Prepare to pay your taxes
Yes, I know what you’re thinking, but you’d be surprised to know that most people approach the tax season expecting to come out of it with a refund every time or at the very least, the same way they went into it. So, let’s clear that up. Filing your taxes could mean three things – you’re owing the CRA, the CRA owes you, or no one owes the other. You’re familiar with the other two, so let’s focus on the first.
It is possible to owe the CRA. I wrote about how this in What Situations Can Lead to a Tax Payable?. But as a summary, here are some situations that can put you in such situations:
- Your employer has not deducted your taxes because you’re self-employed. It is extremely rare for this to happen if you’re an employee, and that’s because the CRA mandates every employer to do so, and employers who don’t are penalized.
- You worked for more than one employer in the tax year and did not correctly fill the TD1 forms. The TD1 – Personal Tax Credits Return enables your employer or payer to determine the amount of taxes to deduct from your pay. Incorrectly completing this return can mean that the tax credits applied on your pay are either less than they should be, or more. In most cases, they are more, and this leads to fewer taxes deducted by the employer.
- You had income from other sources. Income such as rental income, dividends, interests from investments, foreign income, and others. While some of these incomes already come with withholding tax deducted, the accumulation of all your income could place you in a higher tax bracket than what was used in deducting taxes by your employer(s) and payers, and ultimately leave you with some taxes left.
It’s easy to feel overwhelmed by the sheer volume of tasks and information to manage. But with a bit of preparation and the right mindset, you can what looks like an annual chore into a smooth and even rewarding experience. So, think of it as a chance to take stock of your financial health, ensure everything is in order, and maybe even uncover some opportunities for savings.
