In Canada, Money

Always file a tax return in Canada. A potential $8800 mistake.

My friend got dinged the other day by the Canada Revenue Agency (CRA) because she didn’t file a tax return.

She figured that because she had an income of $20,000 a year (from a rental property), and her expenses (the fees/taxes) also equalled $20,000 a year, it cancelled each other out to $0 and she didn’t need to pay or file any taxes.

*facepalm*

She was mixing up the two ideas that her income equalled her expenses for the income property, so therefore she didn’t need to pay a thing.

It is like saying that because I live in an apartment and go to work to pay for said apartment, which all nets out to zero at the end, I don’t need to pay a thing.

LOL.

Income = Taxation

I do not need to tell you (I hope) how silly it is to assume that.

Now she has 2 years of back taxes which will cost her at least $6000 (federally) and $2000 (provincially), PLUS THE INTEREST CHARGED ON THE OUTSTANDING LOAN.

Yes. The government of Canada charges you interest for back taxes, at a rate of about 2% I believe (dang!), which means an additional $800 or more (I think they compound monthly, but..I am not sure)


Total back tax bill for her? $8800 at a minimum.

Here’s the rule in Canada:

If you earned income (any income, even $1), you must pay at least 15% taxes on it (federally) and a percentage provincially (varies by province from 4% – 11%).

You must report it. I don’t care if your income coming in is X amount, and your expenses were Y amount and in the end it WOULD net out to $0.

FILE A TAX RETURN TO SAY SO.

Did you earn $1?

So to recap: if you earned even $1 this year, you need to pay $0.15 in taxes to the government, and up to $0.11 to the province you’re in.

Otherwise, yes, if you earned $0 (nothing at all, which is NOT your case), you don’t need to technically file a return but you should anyway.

Filing a tax return can get you a lot of credits and things you never knew existed including income splitting with a spouse.

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Sherry of Save. Spend. Splurge.

Am my own Sugar Daddy. Am a millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I have 11 side incomes that are on track in 2020 to make me $50K - $75K. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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Posted on August 1, 2020

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4 Comments

  1. M

    Completely agree: file your taxes on time. People who are due a refund don’t get any interest. If you owe, you avoid penalties. If you don’t file on time and wait too long, you can lose some of the amounts that could have been due back to you/reducing balance owing (overpayments on CPP or EI).

    Just for clarification purposes: When you don’t file a return, the government can automatically assess you to have a certain income. If you file late, there is a late filing penalty of 5% if a balance is owed. Then it is 1% interest for up to 12 months. When it is a person who repeatedly fails to file, the penalty and interest jumps to a higher amount. If they send you a letter demanding you file the penalty also gets increased that way.

    Also, a suggestion for your friend. If the CRA automatically assessed the amount, she may be able to reduce the bill owing. She can send in the return again accounting for proper deductions off her rental reducing her income. It would allow her to reduce the possible bill.

    Reply
    1. Sherry of Save. Spend. Splurge.

      Ooo! Thank you for the clarification.

      My friend was just being silly about the whole thing; had she told me sooner I would have been horrified and helped her. I will tell her however, to send in a proper tax return and pay the late fee to see if she can be re-assessed at a lower amount.

      Reply
  2. anonymous

    Most people don’t make an actual “income” in their line of work, which is a profit or a gain. When you do your freelance work as a consultant, you are exchanging your services for monetary value. You made an exchange. You didn’t profit. You didn’t gain. The government doesn’t care and will come after your money anyway though.

    Reply
    1. Sherry of Save. Spend. Splurge.

      Income is not a profit or a gain. Income is that you have money coming in whether from work or investments. All income is taxed.

      Profit/Gain is just the delta between your Income & Expenses, although if you want to be technical about it, you make a GROSS income, and your NET income is a profit or loss.

      Reply

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