This is part four of our five-part #TaxWeek series on everything you need to know about filing your return this year. Here's a recap of the entire series.
We put out a call earlier this month to send any and all questions you had ahead of tax season. And there certainly were a lot of them.
From buying homes, to freelance income and RRSP contributions, the questions we received make it clear that many Canadians still find the tax process confusing.
It doesn’t have to be. We brought in two experts to tackle each of your questions — all in the quest to help you get a bigger return this year.
Here’s what you asked us and what our experts had to say.
How do I know that I have maximized my return? Do I just blindly trust my accountant?
“To an extent the answer is yes,” says certified financial planner Tahnya Kristina. “Unless you get a second opinion, which you'll need to pay for. That's why it's always best to be open and honest with your accountant. Even if you think you're oversharing, always tell them everything about savings, income and spending. They will know which deductions you're eligible for, but they won't know which questions to ask if you don't share information.”
Peky Tsang, tax analyst at TurboTax, adds that “All accountants use software to prepare people’s tax returns nowadays. So, they’re also at the mercy of the software they use to maximize their customer’s return. That said, to ensure that the accountant is also doing their due diligence, users should inquire about any legislative changes for the year and how that might have impacted their return.”
How do I know how much to invest in RRSPs this year?
According to Tsang, there a couple of factors to consider: 1) RRSP contribution room; and 2) amount of taxes owing.
“The amount of RRSP contribution room available will drive the amount one can contribute to their RRSP. There is a penalty associated with over contribution to RRSPs, therefore it’s important to make sure that one does not over contribute. CRA does give taxpayers a $2,000 buffer, so as long as the over contribution is under $2,000, the penalty will not apply.
At this time of the year, most people are contributing to their RRSP to try to lower their taxes owing. There are RRSP calculators to estimate the impact of an RRSP contribution to one’s taxes. However, it needs to be emphasized that RRSP calculators merely make an estimation, because they do not have a complete view of one’s tax situation. One may get more or less credits depending on their situation (e.g. you get the age amount if you are 65 and over, you get the eligible dependant credit if you have a dependant, etc.). To have a more accurate picture, I would suggest going into TurboTax, and enter all relevant information, that way one can truly determine how RRSP contributions will impact one’s taxes owing.”
For additional details on RRSPs — check out what happened when a bunch of clueless millennials cornered a tax expert.
As a first time home buyer, what do I need to know about my taxes? What can I claim?
“A first time home buyer can claim the Home Buyer’s Amount, which is up to $5,000 of the purchase,” says Tsang. “To qualify, the home must be registered to you, and this amount may be shared between you and your spouse/partner. Therefore, as a couple, this amount can be shared or one person may claim the entire amount.”
Tsang notes there are two other important items that are new to this year: 1) Sale of a Principal Residence; and 2) the Home Renovation Tax Credit.
“The CRA is now requiring the sale of a principal residence to be reported on one’s tax return. If the property has been the principal residence of the taxpayer for all the years he/she has owned it, no capital gain is payable. This tax rule has not changed from prior years. The reporting of the sale, however, is new from 2016 onwards,” she explains.
“The federal Home Renovation Tax Credit is also new for 2016. In general, taxpayers eligible for the disability tax credit and/or 65 years and over, who are making renovations/alterations to their home to make it more accessible/functional and/or to reduce the risk of harm to the individual, would be entitled to this tax credit.”
What should freelancers know about doing their own taxes?
“As a self-employed individual (which includes freelancers), it’s important to be aware of your compliance obligations. This may include filing a GST-HST return, in addition to the additional reporting on their income tax return,” Tsang advises.
“Part of their compliance obligation is to understand what’s an allowable deduction and what’s needed to substantiate a particular deduction if they are ever under audit by CRA. In general, this means keeping track of one’s receipts in an organized fashion. If you cannot substantiate an expense, CRA will deny the deduction, and it will cost you more in the long run due to interests and penalties.”
And, if you are ever in doubt about whether an expense is deductible, Tsang advises that it’s best to ask beforehand. She recommends using TurboTax’s Answer Exchange, where they have a community of TurboTax users to answer any and all tax-related questions.
And Kristina’s best advice for freelancers? “Keep track of everything. Every single dime you spend or earn both professionally and personally. Everything counts at the end of the year.”
How do I know if I should try doing my own taxes or if I should just get someone to help me?
This was a popular question, and Kristina had a clear answer:
“Always hire a professional. Unless you're an accountant I would always hire someone to file taxes and provide guidance throughout the year — especially if you're a freelancer or self employed. I'm a Certified Financial Planner and I have an accountant. Accountants charge by the hour and degree of work involved in each file, so if your financial situation is basic, the fee will be small. Professional advice — whether it's an accountant or a financial advisor — is always worth the cost.”
Tsang’s advice, however, is a little bit different.
“The only way to know is to try it out! While TurboTax has a free offering, this is generally geared towards people with relatively simple tax situations. TurboTax also has paid offerings, which guides a user on a step-by-step basis. And with TurboTax Online, you don’t need to pay until you are ready to file your return. Our Care Agents are also available 24/7 in the event a user gets stuck, or they are unsure about a particular step when preparing their tax return. Therefore, why wouldn’t you try it out?”
RRSP or TFSA — I am SO confused! Help me.
“The short answer is, they both offer different benefits and are intended for different purposes, so Canadians can save in both. There's no need to pick just one or the other” says Kristina.
Tsang provides some additional details.
“The RRSP and the TFSA were introduced by the federal government to encourage Canadians to save for retirement. There are two main differences between RRSPs and TFSAs: 1) contribution room and 2) deduction vs. tax-free growth.”
Whether one should invest into their RRSP or their TFSA really depends on the situation. Generally, if you are young, the recommendation is to invest in the TFSA because at the start if you owe any taxes, it is minimal. This way, you can start building up the “tax free” room early on. By building up your TFSA, it is possible to tax shelter all your income/gains related to your investments, and therefore lessen the overall amount of taxes you have to pay. Whereas, if you are in a high income bracket, it is probably more beneficial to contribute to a RRSP to lower the immediate amount of tax owing. And generally, when you are withdrawing from your RRSP during retirement, you would be in a lower tax bracket and again, would be paying a lesser amount of tax.”