How to compute and file your own income tax in Canada

file your own income tax in Canada

In Canada, computing your own income tax is a dying art. Most of us would rather consult a tax professional or use tax software. At first glance, the real reason seems to be a convenience, yet most of my officemates admit that they do this because they find the process of doing one’s own income tax too cumbersome.

The truth is, I also used to seek professional help in doing my own income tax, but I had an idea one-day. I thought, why don’t I try to work on it myself to save money on professional fees. I must admit at first that the tax form looked pretty complicated to fill up myself, but I decided to give it a try. Who knows this experiment might all end up to be a nice on-the-side business opportunity (Oh the entrepreneur in me!)?

In the beginning, the whole thing looked like a lot of legal mumbo jumbo to me, but being a frustrated lawyer, I happen to have some mysterious liking for clauses and contracts. While most people brush these things aside and sign right away with their pens, I prefer to get my fingers dirty on financial and legal matters before I sign away my freedom. I was confident that pretty soon I would be able to comprehend the confusing tax terminology and eventually unlock the logic behind it all. I was right! Things do line up like a perfect target when you put your heart and mind into it.

Among the fruits of answering to that challenge was a much higher refund for two years in a row now. So I thought I’d share my newfound secrets with everybody. Here goes: The Canadian tax system leaves a lot of room for an individual to lower the income tax that one has to pay. I wouldn’t call it a legal loophole in the true sense of the word. I can only pose a theory: maybe, just maybe, the taxman has designed it that way to give taxpayers the feeling that they do have some degree of control in determining their taxes (right, Ottawa?).

For example, through the Registered Retirement Savings Plan (RRSP) which is already a regular staple of our tax system, you can bring down your taxes by becoming committed to saving for your future. In other words, instead of putting the money into the government’s pocket, you get the chance to put it in yours! High taxation prohibits you from withdrawing your savings while you are still working, but when you’re not RRSP is really worth it. Maybe there’s some truth to the rumor that there won’t be any Social Security left by the time the baby boomers reach old age? Just thinking.

Here are some more findings from my scrutiny of my own tax forms and the challenge to prepare it myself.

Every year, the government mails each of us a copy of that dreaded T1S-B form which always comes with the so-called T1S-B Income Tax and Benefit Guide, but you know what? Nobody really reads it. Yet the key to understanding your income tax is in that booklet. That is what most Canadians don’t realize. The booklet outlines in a neat form which tax recourses a taxpaying citizen can run to in order to secure the most advantage for his or her income tax.

For example, if you are married and with children, generally there are less taxes to pay. The same also goes for taxpayers with a homebusiness. There are a lot of opportunities for the entrepreneur to use his operating expenses to lower his income tax. If people only read the Benefits guide religiously, there’s really no need to flock to the tax professional’s door year after year!

After a close scrutiny of the guide I have this to say. There exists a sincere desire to support entrepreneurs to succeed in their ventures, judging from the effects of the Canadian tax instrument; otherwise, there wouldn’t be that many clauses that enable these people to use their expenses (advertising, bad debts, rent, etc.) to help lower their taxes. Perhaps the government really recognizes the value of these individuals to the economy as a whole? After all, the role of small business in the economy has been growing steadily year after year.

In particular, entrepreneurs are even allowed to claim yearly a percentage of their capital expenses, which is technically known as Capital Cost Allowance. So what happens? The entrepreneur puts up more capital, the less tax he pays. Instructions for securing these tax advantages are found in separate booklet titled “Business and Professional Income” guide (in its present form about 50 pages and downloadable in Adobe Acrobat format from the government website. The entrepreneur also has to fill up a separate document called Statement of Professional Activities (form T2032 E) which contains all the details pertinent to one’s total calculation in Line 135 or 137 which is discussed below.

At first I suspected that the Canadian tax system was biased towards married couples, meaning if you are married with children you are entitled to more tax benefits than if you were single. My views changed, however, when I came across the so-called Equivalent-to-Spouse clause, which is Line 305 of the tax form.

How does this work? Well if an individual is single but he lives with say a parent who isn’t working, the individual is entitled to claim some benefits for himself or herself. From a macro point of view, this tends to encourage Canadian yuppies to live with their parents while they are still single, which tend to keep families together. Is this an intended effect? I am not sure.

Form T1S-B is a four-page form, which is used to file one’s income tax. The first page is merely basic individual information to fill; it’s on the succeeding pages that computations actually begin.

The filer starts by entering one’s total income on Line 101. If one runs a small business, it’s better to fill up form T1 General which provides additional provisions (Lines 135 through 143 for small business entries). Along these lines, the individual enters a negative figure, which offsets his total income, say, Line 137 for Professional Income.

Another main portion of the tax form is Net Income and this is where one enters one’s RRSP contribution (discussed earlier) precisely on Line 208. Lines 137 and 208 are important entries towards lowering one’s income tax, and should be given due attention by the filer for maximum effect.

Another important section is Non-Refundable Tax Credits, which is the most misunderstood portion of the dreaded tax form. This is where you claim your Basic personal amount, Equivalent-to-Spouse amount, tuition fees and medical expenses. Hence, the higher the total on line 335, the lower your taxes. Of course all these amounts are non-refundable as the heading states. This means in simplest terms that you can’t legally request these items to be outrightly refunded to you. At best, these are mere instruments that help lower the taxes that you pay like Donations on Line 349.

The final section is called the Refund or Balance Owing portion where pretty much the final tallies are entered. If you owe money to the taxman, you have an entry on Line 485; otherwise, it’s Line 484 you fill up (refund!). One caveat: check your form against the Benefits guide for any changes in line numbering (the line numbers I am using are all based on the 1999 tax form, which, who knows, might be slightly changed this year and the next; plus, consider some provincial variations .

Once you’ve fully filled up and signed the form and attached all the supporting documents (the tax form neatly reminds you of proper documentation), enclose these items in the envelope provided and proceed to the nearest Canada Post outlet. There you can buy the stamps for your return, affix them on the envelope and turn it over to the postal clerk to mail out.

I suggest you file your return as early as possible if you have a refund. Don’t wait till the last day to avoid long queues and delays in getting your refund.

I worked in the Philippines for a long time where filing your income tax year after year was fairly straightforward. By being that straightforward, however, the Philippine tax system fails to provide as many options as the Canadian model. So even if the Canadian system was more complicated, I still prefer it to the other. I believe it’s a small price we pay for giving more breathing space for ourselves as taxpayers.

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