Episode 03: How to Prep for Tax Season
It's tax season folks, but it doesn’t need to be a horrible, scary thing. You just need to be prepared, organized and informed about how the whole process works.
Whether you’re filing as an individual or as a small business, there’s lots of things to consider to make sure you’re filing correctly and getting all the tax breaks that you can.
What are tax deductions VS tax credits? (2:00-4:00)
Deductions and credits are all the things that can offset the amount of taxes that you owe at the end of the year. You don’t want to leave money on the table, so do your research to maximize your tax return.
Tax deductions reduce your taxable income. For example, if you make $50,000, and have eligible deductions of $5,000, the government will only tax you as if you made $45,000 of income.
This is key for entrepreneurs, freelancers or anyone who currently has a side hustle. When it comes to entrepreneurial costs, as long as it’s necessary for the operation of your business, and you have proof of purchase, you can expense almost anything for your business. Check your own provincial or state government for what deductions you are eligible for, but some examples in Canada include:
RRSP contributions
Charitable donations
Child care expenses
Medical and dental expenses
Moving expenses
Expenses towards your business, or freelance expenses, essentially any expense that is deemed operationally necessary to your business
Advertising fees
Rent/mortgage
Utility costs
New laptop
Phone
Transportation, including car mileage or ubers
Professional fees like legal and accounting
Office supplies
Educational courses & training
Tax credits, on the other hand, are credits that can reduce the amount of taxes that you owe. For example, if you owe $5,000 in taxes at the end of the year but you are eligible for $2,000 in tax credits, you would only have to pay $3,000 in taxes.
When you’re filing your taxes, you’ll be prompted to check any of the tax credit boxes that apply to you. Again, you will have to check your individual provincial or state credits, but in Canada these could include credits for:
Children and dependents benefits
Home Buyers credit
Senior Citizens
Disability
Pension
Student tuition, textbooks, and loan interest
Charitable donations
Expert Tax Advice (4:17)
We’re not the experts, so we called in Laura Davidson to teach us everything you need to know about prepping for your taxes, especially for small businesses and freelancers. Laura is an Accounting Consultant, Business Coach, entrepreneur, and the founder of Modern Money, a financial resource for millennial women. Here are the Taxes 101 basics to know:
The deadline for submitting Canadian taxes as an individual has been extended to June 1, 2020 due to COVID-19. Self-employed professionals can now file up till June 15, 2020.
The deadline to pay all balances owing on your 2019 tax return has been extended to August 31, 2020 to accommodate the effects of COVID-19.
If you’re a corporation, you have six months after your company’s year-end date to file your taxes. So if your year-end is December 1st, that gives you until June 1st.
If you’re filing on your own, the easiest way to submit your taxes is through automated programs like uFile, SimpleTax, TurboTax and QuickBooks.
If you work with a tax accountant, make sure you stay involved and aware of the process. “The more hands on you can be with your money and taxes, the better,” says Laura.
Pay on time! If you miss deadlines the penalties and fees are heavy.
Forms to submit
Individual tax-payers should expect a T4 slip from their employers. Sole proprietors will need a T1, Corporations will file a T2, and anyone with investment income will receive a T5 from their bank.
Preparing for tax season throughout the year
Always be audit-proof: You can be audited back seven years, so make sure you’re prepared for an audit. Especially if you’re an entrepreneur or business owner, it is crucial to keep all of your receipts, says Laura. “Think of a receipt as lost money. If you don’t have it, consider it non-expensable, because you can’t prove the purchase.”
Top up your RRSPs: (10:25) You get a tax credit for contributing to your RRSP, so take full advantage! Your contribution room is 18% of your earnings or a maximum amount. In 2019 the limit was $26,500, and for 2020 the RRSP deduction limit is $27,230. If you don’t contribute in this calendar year, it carries forward to next year. The myCRA.ca site is a great portal when filing your taxes as it shows the contribution limit that’s available for both your RRSP and TFSA accounts. The deadline for RRSP contributions is generally the end of February or beginning of March each year (for 2019 contributions the deadline was March 2, 2020).
Business-owners and HST: (8:00min) “If you are a business owner, sole proprietor, side hustler, or someone who pays HST and income tax, open up a savings account and put aside 20-25% of your revenue every month,” says Laura. “When you charge HST, your cash flow looks higher because you have more money sitting in your bank account, but you don’t own that HST.”
Setting aside that HST money automatically each month will help you prepare for the taxes you owe at the end of the year if they aren’t regularly deducted from your salary.
Once you start earning $30,000, you must register for an HST number for your business. You can register for one before that time if you know you’ll have high operating costs in your first year. “When you spend a lot on business start-up costs, you’ll be charged HST, and you’ll get a refund from the government on all that HST you’ve spent. Then, once you start earning revenue, that HST will balance out and you will owe HST,” Laura explains.
We hope that this episode helps you feel prepared and informed for tax season! If you liked the episode, it would mean the world to us if you would rate the podcast and share it with your friends!
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