Tax mistakes can happen to anyone – I am sure you know someone that it has happened to. It is reported that Canadian individuals and businesses owe more than $25 billion in overdue taxes.
You might (or might not) be inclined to give any of these people any slack. After all, the Canadian Income Tax Act is almost 3,000 pages long and grows thicker every year. That's a pretty thick dictionary. Clearly, it's difficult to keep up with all of the constantly changing rules and regulations.
Your Tax Accountant can help you with changing rules and regulations; but you don’t necessarily need one to avoid some of the most common mistakes people make when filing their returns. While most of these mistakes won't land you in a jail cell, they might cause you a few headaches as you deal with delays in your refund check or pay penalties and interest. So without any delay, and in no particular order, let's get on to some tax mistakes that you won't commit after reading our list.
9. Not Filing on Time
April 30. You know what that date means, so file on time. Interest and penalties pile up fast for late filers. The date stirs feelings of dread and anxiety in working Canadians nationwide, and with good reason. Between gathering your T4s, finding all of your receipts and financial records, and filling out your tax forms, doing your taxes can be an ordeal. A large number of people tend to wait until the last possible moment to file their taxes.
While taxpayers might naturally be tempted to wait a few weeks after the deadline before filing, that decision could cost them. The CRA charges interest on any unpaid taxes, starting from when payment is due until the payment is received. In addition to charging interest, the CRA also charges a penalty for filing late (5 percent of the amount owed plus 1 percent for each month or partial month the return is late filed). Depending on the amount someone owes and how long he or she waits to pay, interest and penalties can mount up in a hurry.
If you need any more motivation to get started on your taxes early, the CRA notes that people who wait until the last minute to file typically make more mistakes on their returns. These people typically have more complicated returns as well, adding to their stress as the tax deadline draws near. What kinds of mistakes? Read on to find out.
8. Missing or Incorrect Information
We do all that work of preparing our taxes and then many of us forget the easiest part of all -- signing.
You've gathered all your records, filled out your paperwork and sent everything in on time. What's holding up your refund check? Chances are your return wasn't fully filled out. Maybe your Social Insurance Number was incomplete or illegible. Perhaps you incorrectly filled out your direct deposit information, so instead of having your refund cheque deposited directly into your bank account, the cheque was sent by mail. Or you just simply forgot to sign your return; remember to sign before you file. These mistakes are easy to fix, they happen a lot, but can result in substantial delays in processing your return.
7. Math Errors
If you haven't dusted off your math abilities in a while, tax software can help you. Just make sure to put in the right numbers to begin with.
For some of us, math class might have been the last time we dusted off the calculator and crunched some numbers. Math errors are quite common on tax returns; filing electronically can help, since your tax software will do most of the math for you. Of course, if you accidentally enter the wrong numbers in the first place, your tax software won't be able to help you out.
The CRA does check the returns, and sometimes those math errors work out in your favor, resulting in bigger returns than you were expecting. Other times, you may end up owing the CRA money and incur interest payments as well. Even the CRA makes mistakes occasionally, so if you receive a letter from the agency regarding math errors on your return, make sure to check their work.
Avoiding the next mistake on our list requires more effort, but that effort can be very rewarding. Read on to find out why.
6. Falling Behind on the Latest Tax News
We've already established that keeping up with the latest changes to the tax code can be quite a challenge, but you can miss out on some major news and information if you fall too far out of the loop. This year for instance, there was a tax alert warning Canadians that donate to a gifting tax shelter, should be expected to be audited. The CRA and Ontario governments also post the latest news affecting individuals and businesses such as information about the latest tax scams or court rulings.
The easiest way to get this information is through the CRA Web site, www.cra-arc.gc.ca/whtsnw/menu-eng.html (the "What’s New" section is particularly helpful). Looking through some of the agency's resources can be time very well spent. You can also talk to a tax professional about your situation. If they're knowledgeable and current on the latest changes, they can tell you of any credits or rebates that might apply to you. After you've read up on the latest changes and filed your tax returns, make sure to avoid the next mistake on our list.
5. Not Keeping a Copy of Your Return
You probably have a file cabinet (or two or three) full of papers you never look at. When it comes time to get rid of some of them, make sure your prior tax returns don't make it into the "shred" pile. What if you made a mistake on a previous return? In that case, you can file a T1 adjustment request and possibly receive a larger refund for the amended year. Its recommend that you allow your initial return to process before filing an amended one, since having both returns open at the same time can cause massive headaches for both you and the CRA.
Most people don't need to worry about tax fraud investigations and unreported income. Still, definitely get a copy of your return, particularly if you enlist the help of a tax professional. Your previous tax returns will help you to see trends in your income taxes and to prepare your tax returns in the future, making them well worth a little space in your filing cabinet.
The CRA has several guidelines to help you know how long to keep your returns. But generally you should hold onto the return in question for six years.
4. Faking Your Death (and Other Dirty Tricks)
Granted, faking your own death may not strictly fall under a list of "common" tax mistakes, faking your own death is hardly the only way to commit tax fraud. Hiding money offshore and abusing charity donations also fall into the category of fraud and can land you in serious trouble. The Canada Revenue Agency maintains a search-able list of Canadian charities.
3. Missing a Tax Break
Up until now, most of the mistakes on our list were the sort that resulted in penalties and hassles. Missing tax credits and deductions can sting in a different way, since you can end up paying way too much when you file. You wouldn't be alone. In fact, millions of Canadians actually overpay their taxes by thousands of dollars each year.
To make sure you don't contribute to that figure, pay close attention to any tax credits or deductions that apply to you.
2. Filing Under the Wrong Status
Choosing your status has a big impact on the types of standard deductions you'll receive on your tax return. While the process is often straightforward, a couple of areas can cause some confusion. First, make sure to check the right status (you can only have one status not two). For many people, their status changes during the year. If you get married or divorced over the course of the year, make sure to reference your status as of Dec. 31 of that year.
Although choosing the right status on your returns is important, avoiding our next mistake is even more so.
1. Not Filing at All
Even if you don't have the funds to pay your tax liability at the moment, the CRA encourages everyone to file their return. Once the return has been assessed a payment arrangement can be made with CRA. While you will still be charged interest you will have successfully avoided late-filing penalties. The failure to file tax returns will also result in termination of various benefits such as Child Tax Benefit, HST benefit, Universal Child Care Benefits and the Working Income Tax benefit.
Keep reading for more links on the tax man.