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We know you don’t want to think about taxes right now. It’s December! You’re thinking. My normal plan is to start panicking about taxes in about three months! We get it. No one wants to think about taxes now. Or ever. But, by doing a few quick things this winter, you can avoid some very predictable pitfalls that cause stress, cost money, and often create financial mayhem come the April 30th filing deadline.
To lay out exactly how to escape these common tax blunders, we corralled Wealthsimple’s in-house tax expert, Caroline Corbeil, for her advice.
Trap #1: You’re not stuffing receipts in a folder
In a perfect world, you would have kept all your receipts organized throughout the year. But one of the worst things you can do is say to yourself, Well, I never saved any receipts, so I might as well keep being totally disorganized. If you get organized now, you’ll not only save time later, but you’ll also be able to take advantage of tax credits and deductions that you wouldn’t have otherwise. For instance, if you’re making a charitable contribution this year, there’s a good chance it’ll be right about now: the $10 billion or so in tax-deductible donations that Canadians give each year is concentrated in December. So, if you’ve neglected to save your receipts, start. Corbeil recommends using a regular old paper folder, as well as a digital one, and stuffing all your receipts in there so they’re in one place. You can also spend a few minutes searching your email inbox for words like “invoice” or “receipt” and dragging deductible expenses you might have forgotten about into an email folder.
Trap #2: You’re not saving money in a separate account if you’re self-employed
One of the best ways to make tax season harrowing is to owe a bunch of money you don’t have, which is a very easy thing to do if you happen to be freelance or self-employed. Ideally, you would have begun saving months ago. But freelancers and self-employed folks enjoy a later filing deadline than everyone else — June 15 — so you’ve got a lot more breathing room than most folks to shore up your cash reserves. As you probably know, you should have saved 30% of your income for taxes. But the good news, says Corbeil, is that if you start now, you can play catch-up. Tax calculators, like this handy one by Wealthsimple, can give you a more precise estimate about how much you’ll likely owe. Once you have a rough total, Corbeil advises setting up automatic bank withdrawals to transfer money from one account to a separate you don’t touch, to reduce the temptation of spending the money on other stuff.
Trap #3: You’re not maxing out your RRSP — or at least trying to
In 2019, only about 22% of Canadians who filed taxes contributed to a Registered Retirement Savings Plan, or RRSP, according to Statistics Canada. Which, Corbeil points out, isn’t just bad news for your retirement, but also for your tax bill. Whatever amount you contribute to an RRSP essentially gets deducted from your annual income in the eyes of tax authorities. How does it work? Simple: every dollar (up to your contribution limit) that you put into an RRSP gets deducted from your taxable income. If you earned $85,000 this year, say, but you contributed $10,000 to an RRSP, the government will tax you as if you made only $75,000. And, though you can contribute till March 1, 2022, and still have it count toward your 2021 taxes, the clock is ticking. To know how much you can contribute, just check your Canada Revenue Agency (CRA) account online, or check last year’s tax-assessment notice. (Note: for some people, a Tax-Free Savings Account, or TFSA, might be a better choice than an RRSP; we’ve got a handy guide if you’re unsure which is best for you.)
Trap #4: You’re paying an accountant when you could do your taxes yourself
There are some very good reasons to hire an accountant or tax preparer to handle your return — if you own multiple companies, say, or if you do a lot of overseas business. If that’s you, now’s the time to find help, because preparers can only take on so many clients; but first, be sure you really need one. For one, tax preparers charge between $50 to $150 on average. Second, experts agree that, though your return might seem big and scary, the majority of Canadians have fairly straightforward returns that can be filled easily and accurately with online tools (like, cough cough, Wealthsimple Tax). A good test to see if you need a pro? If you’ve used an accountant previously, Corbeil recommends taking your old return and re-entering the information into a DIY tax software. If you get the same or a very similar return, you probably don’t need an accountant.
Trap #5: You’re going to file late or make other unforced errors
About 60% of Canadians receive some sort of tax refund, and you don’t want to cut into yours by racking up penalties for filing late or for failing to report all taxable income; fines for the latter run as high as 50% of the understated tax. The best way to hit the deadline is actually doing something super boring and simple: make a spreadsheet that contains all your income from your primary employer and, more importantly, from freelancing and side-hustles. That way, when the filing deadline bears down, you won’t have so much work to do that you don’t finish in time, or, worse, underreport your income. T4s and similar tax forms can go MIA in the mail or never get sent in the first place, so it’s wise to keep track of your earnings and not rely on a company’s payroll supervisor to tell you how much you made.
Good job! You’ve taken the first step in not making tax season more painful than it inherently is. Now, actually go follow Corbeil’s advice, and then mostly put this stuff out of mind till next year.
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