Tax season is upon us, and it’s time to start thinking about filing your tax return. For many Canadians, tax time can be stressful and confusing. That’s why we’ve put together this ultimate guide to tax returns. In this article, we’ll cover everything you need to know about tax returns, including how they are calculated, how to get the most out of your tax return, and the top tax return tips for individuals and self-employed individuals.
How are Taxes Calculated?
Table of Contents
- 1 How are Taxes Calculated?
- 2 How can I get the most out of my tax return in Canada?
- 3 What is the maximum tax refund you can get in Canada?
- 4 What causes a big tax return?
- 5 Conclusion
Taxes are calculated based on your taxable income, which includes your employment income, self-employment income, investment income, and other sources of income. The CRA applies tax rates to your taxable income to determine your federal and provincial/territorial taxes owed. You may also be eligible for deductions and credits that can reduce the amount of tax you owe.
Deductions and Credits
Deductions and credits are two ways to reduce the amount of tax you owe. Deductions are expenses that you can subtract from your taxable income, while credits are amounts that are deducted directly from the amount of tax you owe. Deductions and credits can help reduce your tax bill or increase your tax refund.
Some of the most common deductions and credits include:
- Childcare expenses
- Medical expenses
- Charitable donations
- Tuition fees
- Home office expenses (for self-employed individuals)
To claim these deductions and credits, you’ll need to provide supporting documentation, such as receipts or certificates.
How can I get the most out of my tax return in Canada?
To get the most out of your tax return, it’s important to take advantage of all the deductions and credits available to you. Some of the most common deductions and credits were mentioned above. You should also make sure you’re claiming all of your eligible expenses if you’re self-employed.
Self-employed individuals have additional expenses that can be claimed on their tax returns, such as business-related travel, rent or mortgage interest, and equipment purchases. The key to small business expenses is that the expense must be directly related to helping you earn income! Did you know we have a webinar all about small business write-offs? Check it out here Small Business Write-Offs.
Another way to get the most out of your tax return is to contribute to a Registered Retirement Savings Plan (RRSP). Contributions to an RRSP are tax-deductible, which means you can reduce your taxable income by the amount of your contribution. The more you contribute, the more you can reduce your taxes owed or increase your refund – however, there is a cap to your RRSP contribution!
What is the maximum tax refund you can get in Canada?
The maximum tax refund you can get in Canada depends on your personal circumstances. The amount of your refund will depend on your taxable income, your deductions and credits, and any taxes you’ve already paid. In general, the more deductions and credits you have, the larger your refund will be. There are two elements to also take into consideration: refundable vs non-refundable credits.
Typically a refund is the government giving you back your money – I.e. more tax was withheld on your sources of income/more installments were paid than what you owed. You can claim non-refundable credits UP TO the amount of taxes you have already paid. Refundable, however, will get you money back above and beyond what you had already paid.
What causes a big tax return?
A big tax return is typically caused by overpayment of taxes throughout the year. This can happen if you have too much tax deducted from your pay cheque, or if you’ve made installment payments that exceed your tax liability. Overpayment of taxes results in a refund at tax time. It’s just your money coming back to you!
Top 5 Tax Return Tips
- Keep good records of all your income and expenses. Whether you’re an employee or self-employed, it’s important to keep detailed records of your income and expenses throughout the year. This will make it easier to file your tax return accurately and claim all the deductions you’re entitled to! Remember credit card and bank statements are not supported for CRA purposes.
- File your tax return on time. Filing your tax return late can result in penalties and interest charges. Make sure you file your tax return by April 30th to avoid penalties and interest charges. Sole proprietors have until June 15th to file but any monies owing will be due by April 30th. Incorporated? You have 6 months from your fiscal year end to file your taxes!
- Check for errors before submitting your tax return. Double-check your tax return before submitting it to ensure that all the information is accurate and complete. Errors on your tax return can delay processing and result in additional charges. Pro tip: sign up for a direct deposit to avoid delays in receiving your refund!
- Take advantage of electronic filing. Electronic filing, or e-filing, is a convenient and secure way to file your tax return. You can file your tax return online using software approved by the CRA, or through a tax professional like us! Pro tip: sign up for online mail so you get all your CRA correspondence electronically vs snail mail!
- Get professional help if you need it. If you’re not sure how to file your tax return, or if you have complex tax situations, consider getting professional help. Tax professionals can help you navigate the tax system and ensure that you’re claiming all the deductions and credits available to you.
Tax Tips for Individuals
- Keep all your receipts and supporting documents. Whether you’re claiming deductions or credits, you’ll need to provide supporting documentation to the CRA. Keep all your receipts and documents in a safe place so that you can easily access them when it’s time to file your tax return.
- Contribute to an RRSP. As mentioned earlier, contributions to an RRSP are tax-deductible, which can help reduce your taxable income and increase your refund. However, RRSP is an investment vehicle and you also want to ensure the underlying investments are performing well too!!
- Make charitable donations. Charitable donations are tax-deductible and can help reduce your tax bill or increase your refund. Make sure to keep all your receipts and documentation for your charitable donations.
Tax Tips for Self-Employed Individuals
- Keep accurate records of your business income and expenses. Self-employed individuals have additional tax obligations, such as paying into the Canada Pension Plan (CPP) and Employment Insurance (EI), and filing a statement of business activities. Keep accurate records of your business income and expenses throughout the year to make filing your tax return easier.
- Claim all eligible expenses. Self-employed individuals can claim a variety of expenses on their tax returns, including home office expenses, business-related travel, and equipment purchases. Make sure you’re claiming all the expenses you’re eligible for to maximize your tax deductions. The key here is the expenses must be necessary to help you earn income!
- Consider incorporating your business. Incorporating your business can have tax advantages, such as lower tax rates and increased deductions. Talk to a tax professional to see if incorporation is right for you. A corporation by default will not save you taxes – you need to be using it properly!
Pro Tip: Claiming Tips on Taxes
If you receive tips as part of your income, you’re required to report them on your tax return. You’ll need to keep track of your tip income throughout the year and report it on your tax return. Tips are considered income and are subject to income tax and other deductions. Make sure to report all your tip income to avoid penalties and interest charges.
Filing your tax return doesn’t have to be stressful or confusing. By following these tax return tips and taking advantage of all the deductions and credits available to you, you can maximize your tax refund and minimize your tax bill. Remember to keep accurate records of all your income and expenses, file your tax return on time, and get professional help if you need it. With these tips, you can make tax season a little less daunting and a little more rewarding.