Frequently Asked Questions About Taxes

For many, tax season is the most dreaded time of the year. However, much of the concerns surrounding taxes is often due to inadequate information. The truth is clients often have many questions about tax deadlines, deductions, RRSP, or documents needed, but find answers to these questions difficult to come by. To ensure you have all your doubts cleared and are armed with the most accurate information available, Rati Raithatha CPA Professional Corporation has answered some of the most frequently asked questions about taxes.

1. What are the Canadian federal and Ontario provincial income tax rates for 2019?

The federal income tax rates for 2019 are as follows:

15% on the first $47,630 of taxable income, plus
20.5% on the next $47,629 of taxable income (on the portion of taxable income over 47,630 up to $95,259), plus
26% on the next $52,408 of taxable income (on the portion of taxable income over $95,259 up to $147,667), plus
29% on the next $62,704 of taxable income (on the portion of taxable income over 147,667 up to $210,371), plus
33% of taxable income over $210,371.

The Ontario income tax rates for 2019 are as follows:

5.05% on the first $43,906 of taxable income, plus
9.15% on the next $43,907, plus
11.16% on the next $62,187, plus12.16% on the next $70,000, plus
13.16 % on the amount over $220,000.

2. What are the important tax deadlines? (Please note: deadlines are subject to change by CRA)

February 28:
Filing deadline – T4, T4A, T5 slips, and summary information returns.
Payment deadline – final corporate tax balance due for non-CCPCs with calendar year-ends.

February 29 or March 1:
RRSP contributions deadline.

March 31:
Filing deadline – partnership annual information return (T5013).
Filing deadline – trusts having a calendar year-end (T3).
Payment deadline – final corporate tax balance due for most CCPCs with calendar year-ends.
Filing deadline –GST/HST annual return for other than self-employed.
Filing deadline – Non-Resident Tax Withholding, Remitting and Reporting (NR4) return.

April 30:
Filing deadline – Canadian personal income tax return (other than self-employed).
Filing deadline – Canadian personal income tax return (other than self-employed).
Payment deadline – final tax balance due for individual and self-employed.
Payment deadline – GST/HST balance due for individual and self-employed.

June 15:
Second quarter personal tax installment due.
Filing deadline – Canadian personal income tax return (self-employed).
Filing deadline –GST/HST annual return for self-employed.

June 30:
Filing deadline – Corporate income tax returns for calendar year-end corporations.

September 15:
Third quarter personal tax installment due.

December 15:
Fourth quarter personal tax installment due.

3. What are the common penalties and interest for filing late? (Please note penalties and interest are subject to change by CRA)

For late T1, T2, T3 income tax returns filings:
Penalty – 6% of unpaid tax plus 1% of unpaid tax for each complete month to a maximum of twelve months.

For late HST return filings:
Penalty – 1% of any unpaid tax plus 0.25% for each complete month the return is outstanding, to a maximum of twelve months (total penalty maxes at 4%).

For late HST and income tax payments:
Interest – T-Bill rate plus 4%.
For late T3, T4, T5, NR4 and T5018 information return filings:
Penalty – greater of $100 or $10-$75/day times the number of days (to a maximum of hundred days).

For late T5013 information return filings:
Penalty – $25/day to a maximum of $2500.

4. What do I need to file a tax return?

General

Last year’s tax return (if this is our first year).
Last year’s Notice of Assessment (NOA).
Details of changes to personal status – marriage, separation, birthdates, children birthdates, new address, telephone number, disabilities, and death.
Amounts paid by tax installments.

T-Slips

T4 Employment income.
T5 Interest or dividends.
T3 Mutual fund income.
T600 Canada Savings Bond interest
T4OAS Old Age Security (age sixty-five).
T4A(P) Canada or Quebec Pension.
T4A Pension, retiring allowance, scholarships.
T4RIF Registered Retirement Income Fund.
T4RSP Withdrawal from an RRSP.
T5007 Workers compensation, social assistance.
T5013 Partnership income.
T4E Employment Insurance Benefits.
T4PS Profit Sharing Plan.

Deductions

RRSP contribution slips.
Professional fees or union dues (if not on T4).
Donations to charities.
Medical expenses (drugs, dental, glasses, therapy, private health plan premiums).
Summarize by a family member and exclude any amounts reimbursed.
Child care information.
Child activity expenses (maximum of $500 per child under sixteen).
Tuition fees (post-secondary).
Interest on money borrowed to earn investment income.
Safety deposit box (if you own investments).
Investment management fees.
Public transit monthly passes.
Labour-sponsored tax credits.
Spousal or child support paid.
Political contribution receipts.

Investments (excluding RRSP accounts)

Stocks – Capital gains summary report (from the broker) or transaction slips/details.
Mutual Funds – Annual statement showing gains/losses for all investments sold, switched or exchanged during the year.
Real estate sales – agreement of purchase and sale (for both original purchase and sale).

Other

Spousal or child support received.
Property tax or rent paid (if family net income is less than $40,000).
Employment expenses (auto/supplies/home office) (form T2200 required – signed by employer).
Moving expenses (T1M) if you moved forty km closer to the new place of work.
RRSP home buyer’s information.
Details of any foreign income.

Home Office

Electricity, heat, water, maintenance and repairs, insurance, mortgage interest, % use of home for business.

Vehicle Expenses

Fuel, insurance, license and registration, maintenance and repairs, parking, total kilometers driven for business and personal.

Rental Properties

Details of owners/partners, gross revenue, advertising, interest, maintenance and repairs, office expenses, property taxes, travel costs, utilities.

5. How do RRSPs work and what are their tax benefits?
A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government that you use to save for retirement. They have special tax advantages:

a. Deductible contributions.
You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.

b. Tax-sheltered earnings.
The money you make on your RRSP investments is not taxed as long as it stays in the plan.

c. Tax deferral.
You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.

How much can you contribute?
Anyone who files an income tax return and has earned income can open and contribute to an RRSP. However, there are limits on how much you can contribute to an RRSP each year. You can contribute to the lower of:

18% of your earned income in the previous year, or
The maximum contribution amount for the current tax year: $26,500 for 2019.
And if you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP. If you have unused contributions, you can carry them forward.

If you don’t have the money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future. Learn more about how RRSPs work by clicking here.

Here are a few investments you can hold in an RRSP:

Investments that can be held in an RRSP are called qualified investments. They include:

Cash.
Gold and silver bars.
GICs.
Savings bonds.
Treasury bills (T-bills).
Bonds (including government bonds, corporate bonds, and strip bonds).
Mutual funds (only RRSP-eligible ones).
ETFs.
Equities (both Canadian and foreign stocks).
Canadian mortgages.
Mortgage-backed securities.
Income Trusts.
Investments you can’t hold in an RRSP include:
Precious metals.
Personal property such as art, antiques, and gems.
Commodity futures contracts.
As of March 22, 2011, you also can’t hold any of the following investments in your RRSP:
Prohibited investments – Examples: debt you hold, investments in entities in which you hold an interest of 10% or more.
Non-qualified investments – Examples: shares in private holding companies, foreign private companies, and real estate.

If you buy these investments for your RRSP, you will be charged a tax equal to 50% of the fair market value. You may apply for a refund if you dispose of the investment from your RRSP by the end of the year after the tax is applied.

The value of your RRSP may fluctuate, it can go down as well as up but it depends on the investments it holds. So, it is important to understand the risks.

How long can your RRSP stay open?
You must close your RRSP in the year you turn the age of 71. At the time, you can withdraw your RRSP savings in cash, convert your RRSP to an RRIF or buy an annuity.

Where can you open an RRSP account?
Banks and trust companies.
Credit unions and caisses populaire.
Mutual fund companies.
Investment firms (for self-directed RRSPs).
Life insurance companies.

Key Points:
a. You can open an RRSP at any age as long as you have earned income and file a tax return.
b. You must close your RRSP when you turn the age of 71.

6. How can I claim post-secondary tuition on my taxes?
The cost of post-secondary education represents a financial burden to many Canadian students and their families. Tuition itself comprises a big portion of a student’s costs, and qualifying students can claim the tuition tax credit to offset part of the expense of college or university.

Eligibility for Tuition Credit
Generally, any student over the age of sixteen who are enrolled in post-secondary level courses at an accredited institution in Canada can claim the tuition credit. Students continuing education after high school are also typically eligible. Schools outside Canada can qualify if the time abroad is full-time study lasting at least three weeks.

If a student’s employer pays or reimburses tuition, the student is not eligible to claim the credit unless the employer includes the tuition amount in the student’s earnings. This is also true if an employer pays tuition to a parent on a student’s behalf.

An eligible course load must be post-secondary in nature or a trade school can qualify as well. For example, if a student attends university, but takes high school equivalency courses to prepare for later post-secondary courses, the student may not be eligible to claim tuition on the equivalency courses.

Calculating and Claiming Tuition Tax Credits
As a non-refundable credit, if the tuition amount is greater than the tax owed, the non-refundable credit can only be used to reduce or eliminate the student’s federal/provincial tax bill but won’t generate a refund. If you aren’t able to use the full amount of the credit, any unused credits can be carried forward to a future tax year, or transferred to a spouse/common-law partner or parent/grandparent.

The credit is calculated by adding together all eligible tuition fees, then multiplying the amount by the lowest federal tax rate percentage for the current tax. For instance, as the 2017 federal tax rate is 15%, a student paying tuition fees of $2,000 would be eligible for a tax credit of $300.

Tuition Credit Documents
Colleges, universities and other accredited educational institutions issue form T2202A to certify that a student took eligible courses of suitable duration to qualify for the tuition tax credit.

A student who is entitled to the disability credit and is enrolled in a qualifying educational program on a part-time basis is entitled to receive the credit as though he/she were a full-time student. To qualify, the student will need to submit a certified letter from a medical practitioner about their mental and physical impairment. Only if the student completes Schedule 11 will they be able to calculate tuition.

Note that education and textbook tax credits have been eliminated effective from January 1st, 2017 but you can still carry forward unclaimed credits from previous years.

Transferring Unused Credit Amounts
Unused tuition credits calculated on Schedule 11 can be transferred to qualifying relatives. Spouses and common-law partners, parents, and grandparents including those of your spouse or partner can be designated for all or part of the transferred amount.

The students must designate the individual receiving the transfer and the amount of the transfer. This can be done with forms T2202A, TL11A, TL11B or TL11C. Parents and grandparents are not allowed as transfer recipients of your spouse or partner claim an amount for you on lines 303 or 326 on her return.

If parents or grandparents are eligible for the transfer, decide which parent or grandparent will claim the transferred amount on line 324 of their tax return. Enter transfers from student to spouse in field 360 of Schedule 2, which calculates the amounts eligible for transfer between spouses. Please note that you can only transfer current year tuition (up to $5K). Prior year’s tuition can only be carried forward.

2017 Changes to the Textbook and Education Amount
On January 1, 2017, both the education and textbooks credits were eliminated at the federal level.

7. What is a Disability Tax Credit (DTC)?
The Disability Tax Credit (DTC) is a non-refundable tax credit that helps persons with disabilities or their supporting persons reduce the amount of income tax they may have to pay. An individual may claim the disability amount once they are eligible for the DTC. This amount includes a supplement for persons less than eighteen years of age at the end of the year.

The purpose of the DTC is to provide for greater tax equity by allowing some relief for disability costs, since these are unavoidable additional expenses that other taxpayers don’t have to face.

Being eligible for the DTC can open the door to other federal, provincial, or territorial programs such as the Registered Disability Savings Plan, the working income tax benefit, and the child disability benefit.

Who is eligible for the DTC?
You are eligible for the DTC only if we approve Form T2201, Disability Tax Credit Certificate. A medical practitioner has to then fill out and certify that you have a severe and prolonged impairment and must describe its effects. Answer a few questions to find out if the person with the disability may be eligible.

If we have already told you that you are eligible, do not send another form unless the previous period of approval has ended or if we tell you that we need one. You should tell us if your medical condition improves and you no longer meet the criteria for the DTC.

How to claim the disability amount once the DTC application is approved?
You can claim the disability amount on your tax return once the person with the disability is eligible for the DTC.

To claim the disability amount for yourself, see line 316.

To claim the disability amount for your dependant, see line 318.

To claim the disability amount for your spouse or common-law partner, see line 326.

If a person was eligible for the DTC for previous years but did not claim the disability amount when they sent their tax return, they can request adjustments for up to 10 years under the CRA’s Taxpayer Relief Provision.

To claim the disability amount for those prior years, you can ask for a reassessment

8. What are the tax deductions for self-employed individuals?
Whether you are fully self-employed, or have a full-time job and earn self-employed income on the side, the Income Tax Act (ITA) provides guidelines which allow you to deduct a range of business expenses. These expenses are necessary to offset your net income, lowering your income and reducing your taxes owing. These guidelines are limited to a few specific items, which means that the Canada Revenue Agency (CRA) then has the responsibility to determine if the expense was incurred for the purpose of earning income and whether they will be allowed or denied.

Here are the main deductions which you may be eligible to claim:

Business Operating Expenses
Any money spent running your business is considered a business expense, and you can claim it on your tax return as a deduction.

Business expenses include, but are not limited to:

Advertising fees

Start-up costs (including interest and fees on money borrowed for your business)

Delivery or shipping costs

Legal, accounting and similar professional fees

Office supplies

Telephone, Mobile phone, and Internet (where used for business)

Utility costs

TurboTax

Office and Home Office Expenses
If you rent an office, you can deduct the rent and any ancillary expenses for that space. If you have a home office you can deduct its cost.

To determine your home office expenses, calculate the size of your home office as a percentage of your home’s total size. For example, if your home office is twenty square meters and your home is two-hundred square meters, your office is 10% of your home, which means you are able to deduct 10% of your mortgage interest or rent, utilities, home insurance, security monitoring fees, repairs and other related costs on your self-employment income tax return (T2125).

Entertainment and Travel Expenses
If you travel to a convention, meeting or other business-related event, you can deduct all of your travel expenses, including public transportation fees, hotel costs and conference fees. You can only deduct 50% of your meal and entertainment costs.

Vehicle Expenses
If you have a vehicle you use exclusively for your business, you can deduct all of the expenses related to that vehicle, including gas, insurance, repair costs, parking fees, and related expenses. If you use your vehicle for both business and personal use, you can deduct a percentage of those costs based on how often you use your car for business.

For example, if you drive your vehicle 25,000 kilometers in a tax year and 5,000 of those kilometers are for business purposes, you can deduct 20% of your vehicle expenses from your self-employment income.

Along with knowing the total annual mileage of your vehicle, you must keep a log book for your business mileage in order to accurately claim your vehicle expenses. It is also extremely helpful to have a calendar which further ties in the logbook and the travel expenses with clients, and client meetings.

Often Missed Expenses
Other small business expenses are often overlooked. Although each expense may be small, these tend to add up and impact your bottom line tax owing. Bank charges on your business’s back account including the cost of cheques, yearly dues for commercial or trade organizations, parking fees, and private health services plan premiums for you and/or your employees are all commonly overlooked as business expenses. Other little known expenses include interest on vehicle payments, cleaning supplies for home office, and deductions for bad debts and/or the cost of recovering balances owing to you.

Often Overlooked Tax-Deductible Expenses For the Self-Employed:

Business operations
Office and home-Office
Cost of cheques
Yearly dues for commercial and trade organizations
Parking fees
Private health service plan premiums
Interest on vehicle payments
Office cleaning supplies.

If you have any more tax-related questions, reach out to Rati Raithatha CPA Professional Corporation. As a professional accounting firm in Toronto, we offer small or mid-sized businesses and professional corporations outstanding accounting and tax services along with advisory, assurance, and other business-related facilities. To know more about our services, please click here. If you want to know more about how can we help you, contact us by clicking here.