Wealthsimple makes powerful financial tools to help you grow and manage your money. This is the latest installment of our “How To” series, where we lay out smart and easy-to-understand advice on navigating the financial world.
Why is it such a bummer to do taxes? Well, because they’re taxes. Because there’s math involved, and deadlines, and forms that often seem designed by counter-intelligence experts to induce panic attacks. And all the while the stakes are pretty high: is that a nice refund coming down the pike or will I accidentally make a minor error that will erase all my savings and possibly land me in tax jail (note to self: find out if there is tax jail)?
We can’t alleviate all of your fears (there will still be numbers involved!), but we can give you some advice that’ll make the really crucial stuff feel easy.
What’s the smartest way to make my 2019 tax bill go down?
There is one no-brainer thing you can do to lower your taxes. And that’s contribute to your Registered Retirement Savings Plan (RRSP) by March 2, 2020. This year’s new contribution room is $26,500 or 18% of your earned income in 2019 – whichever is lower — plus any unused contribution room you have from previous years. The bonus is it will also help you avoid the poorhouse in retirement.
The RRSP, as you may be aware, is pretty much the best government-sponsored investing deal out there. When you contribute to any RRSP (like a group RRSP at work or one you’ve set up for yourself), you lower your net income, which means you’ll pay less taxes. Meanwhile, you get to keep that money and earn even more by investing it. When you’ve retired and you take the money out, your tax rate will probably be lower.
In the street slang of CPAs, that’s a “win-win-win.”
One thing to remember is the RRSP contribution year doesn’t match the calendar year (unhelpful, we know). That means you could end up with not one, but two contribution receipts for 2019. One for any contributions you made between March and December 2019, and another for any contributions you made between January and the March 2 contribution deadline. Make sure you submit both receipts if you get them!
What’s the dumbest way to make my 2019 tax bill go up?
This one’s easy: filing your taxes late.
No matter how many Netflix shows you binge during the period known as “I’m definitely about to start doing my taxes in a minute,” your tax deadline will not change. It’s April 30. And contrary to popular belief, filing on April 29 is not a very fun “adrenaline sport.”
Here’s why you don’t want to file late: if you miss the deadline and don’t owe taxes, the CRA will hold your refund hostage — including any tax credits you share with a spouse or dependents. And if you miss the deadline and do owe taxes, you’ll be subject to monetary penalties. And they’re steep penalties — starting with 5% on the amount you owe.
If you want to really save yourself the painful period of procrastination, you can even get started on February 24, when the CRA’s NETFILE opens.
Should I actually file my own taxes or just pay someone to do it or do some oil painting instead?
The first question to answer here is: how good at oil painting are you? And the more important question is: what would you be hiring a tax preparer to do? For most people it’s because they think a human is either going to do the legwork for them, or get them a better refund, or hopefully both. That’s an OK assumption for some of us, but for most of us, it’s not.
Let’s start with some good reasons to hire a professional tax preparer.
- You’re self-employed with a basement full of paperwork. Depending on how many boxes of receipts and documents you have to sort through, it may be worth paying someone to sort through them. That depends on how valuable your time is. Professionals at accounting firms generally charge between $100 and $500 per hour. Would you sort through your own materials for $100-$500 an hour? Therein lies your answer.
- You have multiple brokerage accounts with international stocks and lots of complicated trades. Do you need help tracking complicated things like adjusted cost base? Might be a good idea to get some help on that.
- You have multiple businesses and just really don’t have the time to do the detail work.
- Your last name is Trump or you suspect you might have shell companies registered in your name in the Cayman Islands. Good luck!
In reality, you’re going to be the one collecting all the materials no matter what, and there are great online tools (like SimpleTax) designed to get you the best outcome possible — and the confidence that your return is done right. A live human is likely going to charge a minimum of $100 (and an experienced accountant could charge hundreds). If you choose to use a tax preparation software, it’ll run you between $0 and $65. And, we would be remiss not to add, SimpleTax falls at the very bottom of that scale. In fact, SimpleTax is pay-what-you-want, so you can pay whatever you think is fair regardless of how complicated your taxes are. (Yeah. No catch.)
If I got married (or common-law married) do I need to do anything?
Once you’re done basking in newlywed or common-law bliss, declare your new status to the CRA. They won’t send you a soup spoon or punch bowl, sadly, but your eligibility for certain credits (like the GST/HST credit which offsets sales tax) will now be calculated using your new, combined income — which usually means a smaller tax credit. If you forget to declare your status and collect more credit than you should, the CRA may come calling, and then you’ll have to give those funds back.
But it’s not all bad news, as a couple with a combined income and expenses you’ll also be able to optimize your returns. Let us explain:
Certain credits can be transferred from one spouse to the other, so if the spouse with a lower income isn’t able to fully benefit from a credit (like the basic personal income or tuition credit) the higher earner can claim it and help offset their income. And certain shared expenses can be combined — like medical expenses or charitable donations — and claimed by just one person for a higher total refund than if they were split.
Another benefit of your happy union is that you can now open a joint RRSP account — called a Spousal RRSP. You can read about them here.
I had a kid this year! What does that mean for my taxes?
Congratulations! What you lack in sleep you will make up in credits and tax deductions. (And of course fulfillment and joy). A few of those exciting benefits to look forward to are:
- The Canada child benefit: A tax-free monthly benefit that you can apply for as soon as your child is born to help offset the many expenses that come with having a kid. Just apply once per kiddo and keep filing your taxes every year and the benefit is yours. Learn more here.
- Claiming child care expenses: You can deduct the amount you paid for childcare, nannies, or daycare on your tax return, as long as the childcare is freeing you up to earn an income — just add them to your tax return. The amount you can claim depends on your income and the number of kids you have.
- New CARE child benefit, for residents of Ontario only: On top of the child care expenses you can write off, you may also be eligible for the CARE benefit, which gives families a refund for their childcare expenses.
- There are also many provincial credits and benefits (like GST) that may increase once you have a kid, and increase with each subsequent child you have. You can find out more about that here.
One more non-tax related piece of advice: open a Registered Education Savings Plan (RESP)! This is where you can sock money away for post-secondary institutions with one enormous benefit: the government will match your contributions up to a certain amount each year. You can learn more about that here.
Will buying a home affect my filing?
Yep, it sure will, and it’s stuff you’ll want to take advantage of. First, if you bought a home in 2019, there’s something called the “home buyer’s amount,” that allows you to claim $5,000 on your tax return the year you bought your home, which could reduce your taxes by $750.
If you’re planning ahead and thinking of buying a home in 2020, there’s also the Home Buyer’s Plan. How does it work? Well, if you have funds in your RRSP, you can withdraw up to $35,000 tax-free to put towards the purchase of your home — you just have to make sure to add them back within 15 years.
How do I deal with my side-hustle income?
If you — like one in three Canadians — do work outside of your primary job, don’t forget you have to report the income on your tax return. That extra money will most likely be considered self-employment income, so you’ll need to complete a T2125 form. Just enter what you earned and deduct expenses you incurred to earn it (like a metro card for commuting, or gas for your car).
One important note on filing: you may see two deadlines for those filing as self-employed, April 30th or June 15th. We recommend ignoring the June 15th deadline, because unless you’re 100% certain you don’t owe any money, you need to file by April 30th. Why? Even though you can technically file in June, all money owed to the government has to be paid by April 30th. If that sounds confusing, you’re right, it is. Just stick to the April 30th deadline and you’ll be set.
What’s the smartest way to use my refund?
The big question. We’ve said it in the past and we’ll say it again: the best thing to do with your refund is invest. We suggest a portfolio of well-diversified assets that keep fees as low as possible. (Hint: like our Wealthsimple Invest portfolios!) If you’re choosing between putting your refund into a TFSA or an RRSP, you should know that they have very different tax implications:
- If you deposit your refund in an RRSP, you won’t have to pay income tax on that money at tax time next year. This ultimately means keeping more money in your pocket. But that also means you won’t be able to access it until retirement.
- The money you earn in a TFSA is tax-free. This means any interest, dividends, or capital gains earned have no tax consequences, and you won’t have to report it on a future tax return. And you also get to withdraw it with no tax consequences!
Not sure which to choose? Here’s a simple way to think about: if you’ll likely be in a lower tax bracket when you retire, an RRSP might be the best choice; if you’ll be in the same tax bracket when you retire and withdraw the money, a TFSA may the better choice.
That’s it! Happy tax-ing.
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