Family Tax Cut

For people who follow tax updates this is old news, but I wanted to share something important for the 99% of you who are going to be scrambling to file your taxes in the weeks to follow.

Families with one wage earner have been clamouring for income splitting for years now, and the Canadian government has (kinda) listened. Starting with the 2014 tax returns, we can now take advantage of the “Family Tax Cut”. Here’s the link to the CRA’s page about the new tax break.

Family Tax Cut - CRA

I’ve done a couple returns so far that have taken advantage of this tax credit. It’ does seem to have a positive impact on single earner family returns, but it is a bit strange looking. Well, at least compared to what I imagined income splitting would look like.

The form on your return (Schedule 1-A) does the heavy lifting for you. At least on the software I used, once you have your income, your spouse’s income, and the details about your dependants the family tax cut gets calculated automatically.

If you open Schedule 1-A, it will show the details of how much of the wage earner’s income is transferred to their spouse. If you’re familiar with a Schedule 1 (where the actual income tax is calculated) it looks like a side-by-side summary of both spouses. At the bottom you get totals for how much federal tax is owing from both of them. But, instead of seeing those details on both spouse’s tax returns, there is just a single line (line 423) that shows the tax credit (up to $2,000). The spouse with no income still shows a blank return. I have to admit I went through both returns a couple times just to make sure the credit was indeed applied. It just seemed so strange having effectively split the income between both people yet still having a blank return staring back at me.

Personally I think this is a great step forward. It never made any sense that we didn’t have something like this in place. It just seems logical that if a family makes $80,000 per year, the taxes should be the same if 2 of them each made $40,000 or one made all $80,000.

So, when you’re filing your return this year and this scenario applies to your family, make sure you see a nice break on line 423 before you send it in.

3 Reasons You Should Have Filed Your Taxes on Time

For many of us in North America, April 15th (US) and April 30 (Canada) represented the end of tax season. Throughout the streets, you could hear the joyous laughter of those getting a refund, and the gnashing of teeth for those who suddenly realized the government was about to get their Christmas bonus.

But what about the rest of you? The ones who didn't get their returns filed on time. Is all hope lost? Are you destined to be cast out of society like a pariah? I think we will find, like many things in life, the situation isn't binary. It isn't good or evil, yes or no, 1 or 0.

Even as a bookkeeper, there have been times in my {cough} years on the planet where I filed my return late. Yes, you heard that right. Despite all of the fame and glamour that seems to follow us bookkeepers, it turns out we're just human beings. And, just like the mechanic driving the rusted out '73 Olds or the dentist with crooked teeth, we often help others with their finances at the expense of our own financial peace of mind.

Today, let's cover some of the reasons you should have tried harder to get that return done on time. And no, it's not just because the government is scary.

Penalties

No, it's not JUST because the government is scary, but we might as well start there. One of the big reasons we stay up until 11:59PM to make sure the return is done on time is because we want to avoid the dreaded "i" word...interest. The simple way to explain it is that, starting May 1, whatever you owe starts to accumulate interest and is subject to penalties.

As you may suspect, the rules are a bit confusing. Here's an excerpt directly from the CRA site.

If you owe tax for 2012 and do not file your return for 2012 on time, we will charge you a late-filing penalty. The penalty is >5% of your 2012 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of >12 months.

If we charged a late-filing penalty on your return for 2009, 2010, or 2011 your late-filing penalty for 2012 may be 10% of your >2012 balance owing, plus 2% of your 2012 balance owing for each full month that your return is late, to a maximum of 20 >months.

It gets a bit confusing because there are situations where all or part of those penalties can be waived. For future reference, even if you know you can't pay the balance on time, simply filing the return on time will let you avoid the late-filing penalty. You will still be charged interest on the balance, but not the penalty, since you filed on time.

Pro Tip: If you feel there was a legitimate reason you weren't able to file your return on time, you may submit a request to have those penalties reversed. Simply fill out this form, and explain your reasons, and the CRA may waive the penalties.

Benefits

The first thing we always worry about is the penalties. However, a bigger reason to file on time might be the benefits you'd be missing out on. Things like the GST Credit or the Child Tax Benefit are paid out from July to June each year. The first instalment of these benefits in July are based on the figures you send in with your tax return in April. If the government doesn't get your tax return, then you won't receive those benefits until they do.

Let's put this in perspective. Say you owe $2,000 on your taxes, and you don't file your return. You are married with 3 kids, and you don't make a lot of money. Your monthly child tax instalment could easily be $500-800 per month. By not filing that tax return on time, you're missing out on as much money between July-September as you owe in taxes for the whole year.

Your Small Business

Not filing your tax return can also cause problems with your small business. If you run your own small business, you may find yourself in need of some additional finances. Maybe you need to buy new equipment, or whether the storm through a bad season. Whatever the reason, you may want to approach a bank for a small business loan. One of the first things the bank is going to want to know is your most recent tax return information. Not having that available will put a quick stop to your application process.

Once again, filing a couple days late isn't the end of the world. If you didn't get it done on time for a good reason, make sure you fill out that form once you've got your return filed so you can potentially avoid those costly penalties. Just make sure you don't put it off for too long, as it will grow to have more serious consequences the longer you wait.

In the next few days we'll talk about ways to take care of the outstanding return, and how to avoid this situation next year.

Tax Season is Dead...Long Live Tax Season

Well, we’ve finally made it to May 1st. In Canada, yesterday was the deadline for filing your tax returns. For bookkeepers and accoutants in Canada, this is as close to the feeling of the 1st day of summer vacation that we get. No, I’m not taking today off, reading a book by the beach. Actually I will be putting in a regular day...catching up on all the non-tax return work I’ve had to set aside. However, given the fact that I was filling, filing, and otherwise preparing returns from 7:30am - 11:00pm yesterday, a regular day feels like a tropical getaway.

In the next few weeks, I am going to focus my posts on what to do if you didn’t get your return done on time, and how to better prepare for next year.

Today, however, is all about the bookkeepers, accountants, and tax preparers out there. I wanted to take this time to give you a collective pat on the back. I hope you all survived the big day, and a lucky few will actually take some time off to recover.

I’d also like to focus a few of the upcoming posts on how to better prepare for next year from our side of the coin. I know there were a few areas I could stand to improve. I’m going to talk about where I fell short, and some ideas I’ve got for being more efficient during the whole process.

If you had any struggles this year, I’d love to hear about them in the comments, or you can always contact me instead.

Congrats again, but don’t take too long to celebrate. It’s time to get back to work.

Are you ready for tax season?

Yes, it's April already. I honestly can't believe how quickly tax season snuck up on me this year. For all bookkeepers, this is our "playoff season". I'm positive I'll be sporting a terrible playoff beard by the time it's all done.

Before things get completely insane, I wanted to send out a quick post to all of you out there. If you find yourself in a panic, and need some help with your personal or small business taxes, I wanted you to know I'm here to help. Obviously, given the timeline, the sooner you reach out the better.

So, if you need your taxes prepared and filed, want some advice, or even need help finding an accountant, feel free to contact me anytime.