Common Mistakes You Must Avoid as a Taxpayer:
We prepare both U.S. (1040, 1040NR) and Canadian (T1, T2) returns, some of the following information may or may not apply to you.
1. Late filing.
If you are late in filing your Canadian tax return, the first time penalty is 5% of the balance owing, plus 1% of your balance for each full month that your return is late to a maximum of 12 months.
If you were charged a late filing penalty for any of the three previous years your late filing penalty would be 10% of the balance owing plus 2% of the balance for each full month that your return is late to a maximum of 20 months.
If you file on time and don’t have the money to pay they will charge interest only, currently 5% for Canada. There will be no penalties. There might be other consequences such as CRA or IRS freezing your bank account and even putting leans on your house, depending on which country’s tax return you are dealing with. Once filed, you can make arrangements to pay monthly installments of what you owe.
2. Improper or Poor record keeping
If you fail to report tax slips such as T4, T4A,T5018, T5, T3, CRA will catch the omission during their matching process. Each department receives a copy of all relevant tax slips for each corresponding country such as W2, 1040 slips for IRS, T4, etc.. for CRA issued on your behalf. When the annual rush at the end of tax season is over, their computers check what you have reported against the slips they have on file. If you fail to report an amount on your current tax return (missing slip) and you also fail to report any amount on the previous three years you may have to pay a federal and provincial repeat failure to report income penalty. For Canada Revenue Agency the penalties are currently 10% each on the federal and provincial tax owing.
3. Ignoring correspondence from the tax department
Ignoring a letter from the tax authorities is not going to make them go away and if you irritate them they have full powers to enforce tax compliance. If you are not certain what the department wants, contact your tax preparer before you respond. In most cases the tax department will contact us first, if you have authorized Fairtax Business Services to represent you. Every year we resolve a lot of compliance issues on behalf of our clients without even contacting them.
4. Preparing your own taxes
There is no problem with preparing and filing your own return. But, our fee for simple tax returns is so low that in most cases a very small mistake or discrepancy can cost you a lot more than the fee you pay us.
5. Business expenses
Proper record keeping can save you money and headache. This is a good idea for several reasons. One, you know how your business is doing Secondly, the tax department might audit you at some point in the future (they can go back up to seven years) and the outcome may not be pretty. First of all beware that any amounts credited to your bank account can be considered your income unless you prove otherwise. Tax law requires you have to keep a reasonable set of books. You must have records to support all expenses you are claiming otherwise the expense will be rejected and the amount added back into your income. All receipts related to the earning of income should be kept for six years.
6. Charitable Donations & Tax Shelters
Donating money to a legitimate charity is a good thing. make sure you donate to known organizations which have charitable numbers assigned to them by CRA or IRS. All receipts must have such numbers printed on them. Be skeptic of so called tax shelters offering big tax breaks for donations. They will always be challenged by income tax authorities. To this date none have stood up in court. If anyone offers you the opportunity to donate $10,000.00 to a charity, and promises to issue you a receipt for many thousands of dollars more than you donate be careful. Make certain you obtain independent advice. s.
7. Are you an employee or independent contractor?
Your employer and yourself cannot decide that you are now going to be paid as an independent contractor and receive gross amounts without taxes, and relevant deductions being withheld at source.
You should contact your accountant or lawyer or alternatively ask Canada revenue Agency or Internal Revenue Service for their booklet called-Employee or Self-employed form. If you don’t qualify to be considered an independent contractor, the consequences can be expensive. You and your employer are not in a position to decide that you are an independent contractor, rather the courts have decided on the nature of such relationships. If after receiving proper information you are still uncertain, you can ask for a formal ruling from the relevant taxation authority.
8. Keep your Notice of Assessment- NOA
The Notice of Assessment often contains information on carry forward claims that can be utilized in the current tax year. Such things as non-capital loss carry forward and unused RRSP contribution can reduce your current year taxes. Home Buyer Plan contributions and adjustments .
9. Child care expenses
Child care expenses paid to a day care or individual are normally deductible. You can pay day care expenses to anyone including a relative or grand-parent living in your home and who may have little or no income and who babysits. Any babysitting receipt issued by an individual must contain his or her full name and SIN number.
10. Caregiver amount
If at any time in the tax year you maintain a dwelling where you and one or more of your dependents resided you may be able to claim a caregiver amount if their income is low. There are two categories: parents over the age of 65 years or relatives who are over 18 years of age and are dependent on you due to mental or physical impairment. The impairment must be certified by a licensed practitioner.
11. US and other international income
Residents of Canada must declare their world income. Those with U.S. source income and US citizenship should also consider filing 1040 or 1040NR returns.
CRA’s most common requests for back up documentation includes the following:
• Medical expenses
• Moving expenses
• Charitable donation receipts
• Rent receipts
• Claims for eligible dependents (after separation or divorce)
We have been in business since 1996 and have prepared over 25,000 Canadian and U.S tax returns of all types.
Call or visit us at: A-50 Ontario Street South, Kitchener, ON., N2G 1X4, Canada
• Personal Returns (T1, 1040, 1040NR)
• Rental income
• Capital gains
• Final returns (estates for deceased person)
• Corporate tax returns (T2, etc…)
• Trust returns (T3)
Reporting sales of Principle Residence: Starting with the 2016 Tax year, you must report basic information on your tax return when you sell your principle residence.
Canada Child Tax Benefit (CCB)- is a tax free monthly payment made to eligible families with children under the age of 18. It replaces all other federal and provincial child tax benefits.
Children’s Fitness Amount – Under the proposed changes, the maximum amount of eligible fees for each child has been reduced from $1000.00 to 500.00. Children’s arts tax credit has been reduced from 500.00 to 250.00
Family Tax Cut – A proposed non-refundable tax credit of up to $2000 is available to eligible couples with children under the age of 18, and is effective starting with the 2014 tax year. This credit was eliminated effective 2016 taxation year.
Universal Child Care Benefit (UCCB) – see CCB above, changed to CCB as of Jan 01, 2017. Under proposed changes, this benefit is being increased for children under age six. Effective January 1, 2015, parents will be eligible for a benefit of $160 per month for each eligible child under the age of six- up from $100 per month.
GST/HST credit – You no longer have to apply for the Goods and Services tax/Harmonized Sales Tax (GST/HST) credit. When you file your return, the Canada Revenue Agency (CRA) will determine your eligibility and will advise those who are eligible to receive the credit. If you have a spouse or common-law partner, only one of you can receive the credit. The credit will be paid to the person whose return assessed first. The amount will be the same, regardless of who (in the couple) receives it.
We can help if
• You have not filed your return in years (we can go back 10 years)
• You’ve lost all your slips (we can retrieve them after obtaining you authorization)
• You’ve received a letter from the tax department and you don’t understand why
• You owe money and the collection department is on your case
• You have been reassessed and asked for more money but do not agree with Canada Revenue Agency