Understanding the Fundamentals
It’s important that everybody has a basic understanding of income taxes as it relates to things such as when to file and how long to hold on to documentation and records for. Understanding these concepts today can save you time and money down the road. Some general information you should be aware of includes:
- filing a tax return
- province of residence
- U.S. citizens living in Canada
- retention of books and records
- filing deadlines
- assessments, audits and reassessments
Filing a Tax Return
Generally, if you have income subject to income tax in a given year, you must file a tax return.
Why is it important to file a tax return?
By completing a tax return, you help ensure your eligibility for different benefits and tax credits, which include:
- the Goods and Services (GST)/ Harmonized Sales Tax (HST) credit
- the Canada Child Benefit
- certain provincial tax credits
As well, filing a tax return helps you document and carry forward excess:
Filing a tax return also helps create:
- contribution room for RRSPs on the income you have earned
- contribution room for Tax-Free Savings Accounts (TFSAs)
Province of Residence
You file a tax return for the province that you resided in on December 31st of the tax year. The general rule is you reside in the province to which you have the strongest residential ties. Determining province of residency can be complex.
What are considered residential ties?
Residential ties include:
- the place where your spouse and kids reside
- where your bank accounts are located
- the province your health card is for
- where you have memberships for hobby-type activities
For medical students, if you go to McGill University in Quebec but your residential ties are in Nova Scotia, you will likely file a Nova Scotia personal tax return.
For medical residents, you are likely a resident of the province in which you are completing your residency training.
What if I finished my residency this year and plan to begin practicing medicine later this year?
If you are moving from a province with higher provincial income tax rates to one with lower tax rates, you might want to consider moving before December 31 to take advantage of the new province’s lower income tax rates.
If the opposite occurs and you are moving from a province with lower income tax rates to one with higher rates, you may want to delay your move until after December 31.
Are there exceptions to the above situation?
In the case of self-employment income, if you lived in one province on December 31, but your self-employment income was earned in a different province, the provincial tax may have to be allocated to multiple provinces.
If you are unsure about what should be considered your province of residence, one of FWH’s advisors can help you figure this out.
U.S. Citizens Living in Canada
It’s estimated there are 1 million U.S. citizens, dual citizens and green-card holders living in Canada. These people may have tax obligations in the U.S. that they aren’t aware of, so it’s very important to discuss your citizenship status with your FWH advisor so we can ensure you are aware of your U.S. tax filing responsibilities.
As well, because of the ever-increasing American debt, the Internal Revenue Service (IRS) is increasingly identifying and finding people who fail to file U.S. tax returns. It has also imposed regulations to find tax dollars from undisclosed foreign accounts.
What are some of the risks of not filing a U.S. tax return?
Some of the risks include:
- difficulty crossing the border into the U.S.
Retention of Books & Records
Canada Revenue Agency (CRA) recommends all taxpayers keep their records and supporting documents for at least six years from the date of the Notice of Assessment for the particular year.
Maintaining organized books and records is not only legally required, but it is a wise idea so as to avoid time-consuming document searches in the future.
What if I want to destroy records before the six-year mark?
Permission must be obtained from CRA should you wish to destroy any books and records before the six-year period mentioned above.
The deadline for filing a tax return is by April 30 of the following year.
If you are expecting a refund, you can file before April 30 to get your refund sooner. If you expect to owe additional money, you can file before April 30, but you may want to post-date your cheque or online payment until April 30 to delay the payment until it is legally required.
What is the filing deadline if I am self-employed?
If you are self-employed, you have until June 15 to file. However, if you have a tax balance owing, you must pay it by April 30.
What are the penalties for filing a late tax return and not paying my income taxes on time?
If you owe money to CRA and fail to file your return on time, the Income Tax Act has a first offence late filing penalty of 5% of the tax owing, plus 1% per month to a maximum of 12 months. This could work out to a total penalty of 17% of the tax owing. Arrears interest is also levied on the penalty and taxes owing.
What if I have also been charged with a late-filing penalty in one of the three preceding tax years?
In that case, the late-filing penalty would be doubled for this second offence to 10% of the tax owing, plus 2% per month for a maximum of up to 20 months. This could work out to a total penalty of 50% of the tax owing. Arrears interest is also levied on the penalty and taxes owing.
Does CRA levy any other kinds of penalties?
If you repeatedly fail to file income tax returns after CRA requests you to do so, it may levy additional penalties on you. In cases of negligence and/or tax evasion, more severe penalties could also apply.
Are interest and penalties paid to CRA tax deductible or eligible for a tax credit?
Assessments, Audits & Reassessments
It takes CRA four to six weeks to process a conventional (paper) income tax return. For tax returns filed electronically, the timeline is two to four weeks.
After these time periods, you will receive a Notice of Assessment (NOA) and any refund payable to you. It is important to note that a NOA is just a cursory confirmation that the numbers on your return are supported by the information you supplied.
Does the NOA mean my return has been officially accepted and can’t be questioned later?
What happens if I am selected for an audit?
Most times, the auditor will ask you to supply information to support claims you have made.
If the audit finds your tax payable should be for an amount different than originally assessed, CRA will issue a Notice of Reassessment.
What is the timeline for which CRA can issue Notice of Reassessments?
A reassessment can’t be issued more than three years after the date of the original assessment, unless there is suspicion of fraud, or misrepresentation due to “neglect, carelessness or willful default,” states the Income Tax Act. In those cases, CRA can issue a reassessment for any tax year.
What can I do if I disagree with a reassessment?
Your options include:
- having your FWH advisor call CRA on your behalf.
- having your FWH advisor file a Notice of Objection (Form T400A). This is essentially a formal appeal and is a letter which includes the facts of your situation, your reasons for objecting and the reassessment you are seeking.
What is the due date for filing a Notice of Objection?
The due date is the later date of either:
- 90 days after the mailing date on your Notice of Assessment or Reassessment
- one year after the due date of the tax return under dispute. For this option, it would be best for FWH to get involved because this is usually your last opportunity for dispute, unless you are willing to go through costly court proceedings.