I remember when I was younger and getting my taxes done always felt like a bit of a gamble. Would I walk out owing money or would I get a refund? As the years have gone by and I’ve learnt more about taxes, my attitude towards them has changed. But when I talk about them with friends I often see that same look of apprehension that I once had. Like spinning the wheel at the roulette table, no one seems to know what they’re going to get and everyone seems to have their fingers crossed, hoping for the best.
I’m not much of a gambler myself and the good news is, the tax system is set up so that it doesn’t have to be either. Here are some guidelines as to whether or not you’re on track to writing a cheque or getting a refund. This is not tax advice, so please consult your accountant for advice specific to your situation.
As an Employee
If you punch the clock from nine to five and get a T4 for doing it, the company you work for is responsible for deducting enough tax at source to make sure that the government gets their cut of what you earn before the end of the tax year. Here are some situations where this would not be the case:
- If you work a second job From a tax standpoint, each employer you work for will act as if they are your only employer. This may mean that your second employer is withholding less tax than you would owe. This is because in Canada, the percentage of tax that you owe, (your tax bracket) increases with the amount of money that you make. So your second employer could be deducting tax at a lower rate, since they have no way of knowing what you earn at your other job.
- If you changed jobs during the year Similar to the point above, with a job and salary change, the amount of tax withheld at your new employer may not accurately reflect the total income that you earned during the year.
- If you told the CRA you were going to make RRSP contributions and didn’t Some folks that want to make RRSP contributions but can’t find the cash in their day to day budget can apply to the CRA to reduce the tax withheld so that they can make a contribution directly into their RRSP. The deduction that you get should offset the taxes that were not paid. If you decide to do this, get proper authorization and don’t follow through, the CRA can penalize you, and wont authorize it again.
If You’re Self Employed
If you’re self employed, not only are you responsible for all of your taxes, but also for government benefits such as both the employer and the employee portion of the CPP that is automatically deducted from an employee’s paycheque. As a self employed individual, taxes have to be budgeted for as income is earned throughout the year.
Once You’ve Retired
If the amount of taxes you had owing for the previous year was over $3,000, you will have to pay the government quarterly installments. This means that every three months you have to send them a cheque for taxes owing. An alternative to this is having the tax automatically withheld before you receive payments from your pension, annuities and other benefits like CPP and OAS. This will only work if your income comes from sources that allow the withholding.
So there you have it. A few quick tips to see if you’re on track, and to let you know what you can expect whether you’re an employee or newly self employed or retired. But whatever your case may be, if you tax return provides you with a hefty refund you’ve paid too much tax during the year and should engage in some planning to take advantage of missed opportunities.