How to file taxes: The (seriously) beginner’s guide
For those new to adulting (I’m including myself here—and I’m 30), filing your taxes is one of the ultimate nightmares. Once a year, you’re supposed to gather all the random receipts hidden in the nooks and crannies of your apartment, find all the mail you’ve left unopened and somehow amount for it in official government documents. Like, no. With today’s popularity of DIY, filing your taxes solo has been heavily advertised, but take it from someone who knows (I once thought I owed the government $3,000, but actually, they owed me $2,000), doing it yourself isn’t always the way to go. To help you wade through the confusion of how to file taxes, we turned to Shannon Lee-Simmons, accountant extraordinaire and founder of the New School of Finance, and all around money boss lady. Here, she breaks it down in dummy-proof tips (srsly).
When is it okay to file by yourself? And when should you talk to the experts?
“If all you have is a couple of T slips, some charitable donations and an RRSP contribution (read: If everything that you have for your taxes comes on a piece of paper from someone else), filing yourself makes a lot of sense. It’s a paint-by-numbers with your situation. You should talk to someone if you’re buying or selling a home, if you’ve had kids, if you have a rental property, if you’ve sold some investments and if you have freelance income. Talk to someone for at least one year and learn how he or she does it, because there’s lots of room for error.”
How does filing work if you have multiple sources of income (i.e you are a student or a freelancer)?
“Everybody has to file an individual tax return. On your tax return, if you have freelance income, you also include your freelance income as a sole proprietor. They’re just different parts of your overall personal income taxes.”
When should you get a registered HST number?
“Once your cumulative revenue hits $30,000. What usually gets people is that it’s the revenue, not the profit—which means it’s the amount you make before expenses. Let’s say that you write and your freelance income is $15,000 and you’re also a yoga instructor and your income is $15,000. You’re thinking, ‘I didn’t hit $30,000 for writing and I didn’t hit $30,000 for yoga, so I’m good.’ You’re not good. Your total freelancing income or total sole proprietor income hit $30,000 within a 12-month period, so you’re on the hook for HST. That’s when you have to get a registered number.”
Often, freelancers don’t save money for their tax return throughout the year and then get hit with a huge sum. What are some tips to be better about that?
“The first thing to do after you’re registered for HST is recognize that HST is not your money. With HST (13% in Ontario), invoice for your time or your project, and then add HST on top of it. You’re collecting more money than you ever should have. HST should automatically go into a savings account for you to pretend like it doesn’t exist. But that’s not all. If you’re a sole proprietor or freelancer, you have two types of tax. Another thing to do is every time you get a cheque, put a percentage away of what you’ve earned. A safe bet is usually about 20% unless you’re earning over $50,000 a year, in which case you’ll have to put away more.”
What are some things you can write off if you are a freelancer?
“You can only write off expenses that are directly tied to your personal business. A laptop (see equipment amortization below) or software subscriptions (i.e. Dropbox or Adobe) would qualify, but your monthly apartment rent would not—unless more than 50% of your income comes from freelance. If you’re a person who has a full-time job as an employee and you freelance on the side, you don’t qualify. That’s one of the reasons that getting professional help is important. You think, ‘I’m off the hook!’ but you could be raising a red flag.”
What does equipment amortization mean?
“Equipment amortization is when you purchase something that’s an asset to your business. It’s a piece of equipment, like a laptop or a smartphone. If you’re a personal trainer, you might buy a reformer. They’re things that benefit your business for a long period of time. Those are things that you can’t write off completely in the year you buy them. You have to amortize them over the lifetime that they exist within your company. If I buy a laptop that’s $2,000, I can’t just write off $2,000. I have to amortize it over a period of time [which varies depending on the type of equipment you have].”
What are some “creative” things to write off against freelance income?
“It really depends on the business. Creatively speaking, everyone wants to hear clothes and meals. But they don’t necessarily count. If you’re a yoga teacher, then writing off yoga mats is a thing. If you’re a financial planner, you can’t write off yoga mats. It completely depends on what you’re doing and what you do for a business. If you can make the business case that you needed to buy something that was necessary for profit, I think that’s a fair bet. If you can make the case to the CRA and someone would buy the story, then it can count as a business deduction. And sorry to pop the urban tax myth: You can’t write off your daily coffee.”
What about transportation?
“If you have a monthly transportation pass (ie. Metropass in Toronto), it counts for a large tax credit. It’s something that can’t be questioned. For the personal tax credit, you need to have monthly passes or 31 consecutive rides (with receipts) to qualify for the tax credit. Tokens don’t count.”
What about Uber?
“If you’re also a sole proprietor/freelancer and you’ve used Uber or a taxi to get to a client’s place for business, those can count. It has to be specific. For Uber, if your receipt says you were driving somewhere at 3 in the morning from a bar, they’re going to know it wasn’t for business (unless you’re a DJ!).”
What’s the top way to reduce what you have to pay?
“RRSPs. It’s the easiest to access for you, it’s a direct deduction, and you have full control over it. It can’t be questioned.”
There is an urban myth that goes something like, “If you don’t owe anything, you can file late.” Can you clarify?
“It still matters if you file late. You just don’t have any penalty with what you owe. If you don’t owe anything, then the penalty is multiplied by zero. You don’t owe anything, but you’re still considered a late filer. The penalty is 5% of the amount owing. If you owe $1,000, you owe $50 as a penalty. If you owe $0, then you owe $0. Let’s say it’s 2015 and you filed late but didn’t owe anything. Now you’re logged in the system as being a late filer. Let’s say in 2016 you owe a lot of money and you file late. Now your penalties double, even though last year you didn’t owe anything. I would still always file on time.”
How long does that penalty last?
“If it’s two years in a row, then it’s doubled.”
But if you filed late 5 years ago?
“You’re fine.”
Is there a tax break for first time homeowners?
“If you’re a first-time home buyer, you get a tax credit worth $5,000.”
If you’re married, do you file together or separately?
“You file together. In Canada, everyone still has his or her own tax return, but you have to name your spouse. That’s what filing together means. You’re able to share deductions and do some income splitting if you have kids.”
When is the last day to file? What happens if you’re late?
“April 30 is the last day to file for your personal income taxes. If you’re registered for HST as a sole proprietor, you have until June 15 to file. It’s one of the biggest mistakes I see. Filing and paying are two different things. Just because you have until June 15 to file your HST, the file is still due April 30. You have to pay it before you file it. People assume June 15 is the date and they’re late already on their payment. I like to say April 30 across the board. That way, you get it done and pay it all on time. The consequence of not filing and not paying are different. The consequence of paying late is interest accrued on the amount owing. The consequence of paying and filing late is not only interest but you also get a late filing penalty. Filing late is really bad. Even if you’re scared of your taxes and are scared that you can’t pay the tax bill, at least file on time. You can work out a payment plan with the CRA. If you run and hide and file late, you get a penalty that can be quite steep. If you file late two years in a row, the penalty doubles.”
What should you do if you can’t afford what you owe?
“File on time then call the CRA and put yourself on a payment plan. You can pay over six months. As long as you tell them what you’re doing, they’re cool with that. Sometimes people like to borrow from a line of credit to pay off the CRA and then pay off their own personal line of credit at their own pace. It can take longer than six months, like a year. Whatever works for you.”
For more tips (and to download your very own taxes checklist), visit the New School of Finance.
