Tag: income tax Canada

Forgot to file your taxes, now what?

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If you are an employee, the deadline to file your taxes with Canada Revenue Agency was April 30th. If you are self-employed, you have until June 17th to file….but if you owe you had to pay by April 30th.

If you happen to not have filed your taxes by April 30th, you may be wondering what you should do next. Let’s take a look, but first a reminder.

INCOME TAXES ARE LEGAL IN CANADA

Just in case you thought otherwise. It has been so since 1917 when the War Tax Act was first introduced. The act was modified in 1948 to become the Income Tax Act.

Now this is out of the way, here what you need to do if you didn’t file your taxes.

file, whether you owe or not, whether you earned or not

Even if the deadline has passed, you can always file your taxes. Start by doing just that.

It is always a good idea to file, even if you don’t owe money to the government or haven’t earned any money. There are 3 reasons for this:

  1. Qualification for a number of government programs is based on reported income, such as the GST/HST rebate or the Canada Child Care Benefit. If you are not reporting your income, both eligibility and amount for these types of benefits can’t be assessed.
  2. Tax refunds are not automatic. As long as your taxes are not filed, your tax refund will not be released, if you happen to be eligible for one.
  3. Notice of Assessment: if you want to borrow a large amount of money, such as a mortgage, lenders will ask for this document.

if you owe money

You really need to file….and pay what you owe. If you don’t, CRA will come after you at some point. You will also be assessed penalties and interests. They start at 5% of the balance owing plus 1% per month until it is fully paid. The 1% interests compound daily!

If you are a repeat offender, you could be assessed a penalty called “repeated failure to report income”. It currently sits at 20% of the most recent income amount you should have reported. Ouch!

what if you haven’t filed for several years 

Yep. That happens. If this applies to you, you will need to be a bit more proactive.

I suggest you contact CRA and see if its Voluntary Disclosure program could help you. This program will only work if CRA has not already contacted you in regards to your back taxes. If you qualify for the program, you will avoid further prosecution. Penalties will still apply.

Of course, you should file as soon possible! H&R Block and TurboTax can help you file taxes going back several years. You can file them online.

don’t expect your tax problems to go away

This is particulalrly true if you owe the government. The agency can be very aggressive and has a lot of means at its disposal to collect, including freezing your bank accounts, putting liens on properties and/or garnish wages.

The best way to avoid the above ordeal is simply to file your taxes on time. If on one occasion you are unable to do so, don’t let it become the norm. After all, “in this world nothing can be said to be certain, except death and taxes”. Benjamin Franklin (1789). 

The higher tax-bracket myth

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Very often, I hear people complaining about paying more taxes as a result of working overtime, taking a second job or receiving a bonus.

A very common sentence is: “working overtime puts me in a higher-tax bracket, so it may not be worth it”.

there is no such thing as “being in a higher tax-bracket”

People claiming this don’t understand how the Canadian tax system works. I don’t blame them. Taxation is a very boring matter.

That being said, I believe that understanding a few tax basics can help anyone make better financial decisions.

canada has a progressive tax system

Basically, it means that people will pay more taxes as they earn more money….but in a progressive manner or a tiered-manner. Here are the federal tax rates at the time of writing:

  • 15% on the first $45,916 of taxable income
  • 20.5% up to $91,831 
  • 26% to $142,353 
  • 29% up to $202,800 
  • 33% of taxable income over $202,800

For the sake of simplicity, let’s say an employee earns $ 45 000 gross per year. In refering to the above tax rates, our employee will be taxed at 15%.

Now, let’s say that our employee works overtime during the year, and earns an extra $ 5 000. Their gross income is now $50 000. In refering once again to the above rates, our employee will now pay 20.5%, right? WRONG! 

This is not how a progressive tax system works.

Our employee will actually pay taxes of 15% on $ 45 916 and 20.5% on the remaining $ 4 084.

This is where most people are confused. They think that their entire income will be subject to a higher tax rate, when it is not the case.

you can work overtime

As demonstrated above, working overtime will not result in a massive tax bill. Keep in mind you may be eligible for additional tax credits when filing your return.