Pay Taxes or Your RRSP ?

Given my love for the RRSP (or the Tax Deferral Savings Plan), I was wondering whether folks use it to defer owed taxes? The simple question is Pay Taxes or Your RRSP ?

If you received my T4 early enough that you could estimate my taxes, what would you do if you estimated you owed $500 taxes?

You have two options:

  1. Give the CRA their $500 and forget about it
  2. Put enough money into your RRSP (before March 1st) to counteract the owed taxes. This means you would then owe $0 in taxes.

The argument I keep hearing is that if I put money away in an RRSP now, I’ll just end up paying a higher tax rate on it when I take the money out. There is a school of thought that you might be in a higher tax bracket when you retire. To me, it seems an odd statement given the money will grow (hopefully) in your RRSP. This mean you’ll have more money to be taxed, albeit at a higher rate ?

I tried very hard to find what your nominal tax rate might be in Ontario, but let’s just assume it’s 50% for you.

This means you need to put about $750 into your RRSP to not pay $500 in taxes to the CRA. To do this exercise, if you have Quicktax or something similar, you can simply plug numbers into their RRSP estimator. This might be a better way to estimate, how much to pay.

Now you have $750 in your RRSP, and say you are 32. You have about 30 years until you want to take your $750 out. Assuming a simple growth 4.5% year over year, it will be about $3100.

Why not Put It in an RRSP ?

You now take $3100 out at a higher tax rate (say 60% again hopefully taxes in 32 years are not that brutally high), but it is still about $1300 dollars net. The bonus is you didn’t have to pay the CRA $500 32 years ago (an added bonus).

A net investment of $250 (you were going to have to spend $500 no matter what) you end up with $800 ? Seems like a winner to me.

Why wouldn’t you do this? If you didn’t have $750 dollars I suppose that might stop you, but are there other reasons?

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Get Your Taxes Done Dammit !

In Canada, you should have your taxes and in to the CRA by April 30th. Occasionally there are extensions, but it does not appear to be the case for 2018. Get on with it, and get your taxes done.

If you are ill, disabled or unable to file your taxes, you can ask for an extension, but it is better to get your taxes done on time. Why is it important? Let me quote the Canada Revenue Agency directly:

If you do not file your return on time (see exception to the due date of your return), your goods and services tax/harmonized sales tax (including any related provincial credits), Canada child benefit payments (including related provincial or territorial payments), and old age security benefit payments may be delayed or stopped.

I know a few folks who don’t usually submit their taxes on time and here are some of the excuses I have heard about not doing your taxes on time.

I didn’t get my T4

Doesn’t matter, you are supposed to go to the CRA site and see what data they have for you. Yes, employers not getting important data to you on time is annoying, but this is not a valid excuse. You can log onto your CRA account on line and see if they have your T4 information.

If you get incorrect information, all you can do is file with the information you have and send in a correction later. This year many Civil Servants are getting Phoenix’ed again, by getting T4 receipts with incorrect information (including CRA employees). Not ironic, but interesting.

The dog ate my T4 is also not a valid excuse.

Saying you are waiting for data so you can get a bigger refund is foolish as well. You can always file for a correction later, get it done now.

I don’t owe money, so I can do it later

So you enjoy making long-term no-interest loans to the Government? You also enjoy not getting your Government benefits? Are you really sure that you don’t owe money? The assumption that your employer did your tax forms correctly is admirable, but are you sure? If you are a Civil Servant I would never make that assumption.

Not enough time to get it done

So you are one of the 1% and your taxes are really complicated? If you have a job, a wife, kids and little or no investments, your (and your spouses) taxes can take less than an hour to do. There are plenty of free community workshops that can help you get it done. Spend the hour or two and get it done.

It is far too complicated for me

When I first did my taxes, I was petrified of the whole process. I had to manually calculate and fill out (in pen) my entire tax form. These days, you can get free software to get your taxes done. You can do it all for free, and most of the software are relatively straight-forward to use.

You don’t need a calculator, white-out, erasers, pencils or anything else, just a computer or access to someone who can do it for you. Ask a family member who may have a copy of Quicktax, they can typically submit for you (at not extra charge). Our Church offered a tax clinic that helped you fill in your tax return (if you make < $40K).

Fast Cash Back?

Please don’t go to the Fast cash back scams run by a few companies. Wait for your refund, and get all the money you deserve, when you get your taxes done!

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Giving Tuesday My List



I really don’t buy into the Black Friday, Cyber Monday and such tom-foolery, but Giving Tuesday is something I can get behind. There are many wonderful charities that need your help, and for those unsure here is a short list you could use. Make sure you give to them and not over arching “charities”, they take too much for Management Fees.

Giving Tuesday

Charities that Need Your Help:

You shouldn’t really need a specific day to give, Charity is an important part of any financial plan. It is also near the end of the year, money you give now counts towards this years taxes! Keep that in mind. You could give Charity as a Christmas gift too.

 

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Tax Tips to Remember 2017

Now that RRSP Season is over (for fiscal year 2016), here are some Tax Tips to help you get your returns completed, and in to the CRA.

Some Simple Tax Tips

Tax Tips

Income Tax Time 2017

Every year there are nuances and changes to the tax world. However, there are also tried and true tax tips that you need to remember most every year.

  1. Do you have every single form that you need? Most of us need a T4, but what about other forms?
    • T5 for investment income
    • T2201 if you have tuition and post-secondary costs
    • Charitable Donations? Especially this year with new rules for first time contributors
    • Medical Expense can be important if you have enough expenses
    • RRSP receipts are very important, especially if you just made a large deposit.
    • Daycare receipts are important for dual income families
    • Rental costs if you are lower income
    • Disability Tax Credit claims
  2. If you got married in 2016, don’t forget to tell the CRA about this. This might help your taxes, but the CRA needs to know. I tweet’ed about this, and surprisingly, a fellow financial blogger admitted to forgetting to do this.
  3. You can auto-fill your return this year, just buy Tax Software, go to the CRA Auto-Fill web page, and follow the instructions. This means no one has an excuse to not file their taxes this year.
  4. Go over your 2015 (or previous year) tax return. I do this every year, because I always forget to claim things, and the previous year return reminds me. The statement of assessment is important to see whether your claim was correct.

These are only a few simple tips, but it is time to start thinking about your taxes.

Tax season

T4 From the CRA Web Site

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Tax Tips for Prize Winners

As most of my regular readers know, my views on Guest Posts are quite simple, but on occasion I do allow for a guest writer, and this is another instance, and this one Tax Tips for Prize Winners, is a useful post.


Tax Tips for Prize Winners

By Jennifer Gorman, TurboTax

Earlier this year, it was announced a Mississauga woman had won Canada’s largest lottery jackpot ever – $64 Million. We’ve all dreamed about winning the lottery, retiring early, living a life of luxury and taking vacations at any time. With that said, let’s take a look at what winning the lottery means in terms of taxation for any lucky winners.

Casinos and Lotteries

Canadians are in luck when it comes to lottery and most casino winnings as they are considered windfalls and are tax-free! Even winnings from most sports pools, sweepstakes, or lotteries sponsored by a charitable organization are generally tax-free.

However, while the Canada Revenue Agency (CRA) doesn’t require you to pay tax on the winnings themselves, you are subject to tax on any money your windfall generates. Interest earned from bank accounts, GICs, and savings bonds is considered taxable income and must be reported on your tax return.

Does method of payment for the winning ticket make it taxable? No, method of payment for your ticket, even if it’s given to you as a gift, doesn’t change that the winnings are considered non-taxable windfalls.

Thinking of going pro as a card shark? The CRA has recently begun examining how “winnings” by professional gamblers are treated. Because of the expectation of profit, the theory is that monies won by professional gamblers should be classified as business income and subject to tax like any other type of business income. This means professional gamblers could also deduct related “business” expenses such as travel expenses, tournament fees, and equipment used in gambling. This theory is interesting as it opens to door to claiming a business loss if you didn’t win enough to cover your gambling expenses.

Workplace contests

Prizes won through your workplace are generally counted as part of your income. Your employer will deduct income tax, Canada Pension Plan and in some cases, even Employment Insurance premiums on this type of award. Your T4 will have the amount of the taxable benefit listed in box 40.

The one potential exception to this if you win a prize in a draw by a social committee in your workplace. If the social committee, which is entirely funded by employee fundraising, paid for the prize, then any gifts or awards the social committee gives out are non-taxable. This isn’t the case if the committee is funded by the employer, as any gifts or awards the social committee gives out are taxable benefits.

Niagara Falls or Vegas?

While both can be lots of fun, if you hit the jackpot from an American source, your winnings will be taxed. The US Internal Revenue Service (IRS) considers all winnings, even from lotteries, to be taxable. If you hit the jackpot at a US casino, expect a good chunk of those winnings to be withheld by the casino to ensure your tax obligations are met before you even leave the country. Even if you win big from your own home on a US online poker site, for example, your big score will be considered to be American income and taxed accordingly. You may also be required to submit a US tax return the following April to ensure the proper amount of tax was remitted to the IRS.

About Jennifer Gorman:

Jennifer is a tax expert with more than 20 years experience helping Canadians. She enjoys holding seminars in her hometown in Newfoundland to teach seniors and students how to use TurboTax to prepare their own returns.


Site Note: Now just because this article talks about winning at the lottery, this does not mean I want you to go out and buy lottery tickets! That is not the message to take away from this, this is an informational piece about taxation.

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