You had your best-laid plans and then COVID-19 came along and hammered the entire economy. But you’ve got this – if you have the right information. Join Rob Carrick and Roma Luciw on Stress Test, a podcast guiding you through one of the biggest challenges your finances will ever face.
ROMA: Taxes. It’s one of the least sexy topics around, but people still get hot and bothered around tax season, mostly because they can’t figure out exactly how much they owe or whether they’ll get anything back.
ROB: We know that most of you do not have an accountant on your favorite contacts list, so we’re here to demystify some tax basics and offer tips to get you through this tax season.
ROMA: Welcome to Stress Test, a Personal Finance Podcast for Millennials and Gen Z. I’m Roma Luciw, personal finance editor at the Globe and Mail.
ROB: And I’m Rob Carrick, personal finance columnist at the Globe.
ROMA: Tax season can be, well, taxing, whether you’re a gig worker trying to keep track of receipts or a remote employee struggling to figure out how much office space to claim. Filing a return can be daunting, especially if you’re just getting started in the working world.
ROB: So we’re dedicating this episode to everything you need to know about your taxes. After the break, I’ll speak to a tax expert.
ROB: Jamie Golombek is the managing director of Tax and Estate Planning with CIBC in Toronto. Here’s our conversation.
It seems like for most people the taxes are something of an afterthought, or at least something they want to spend as little time on as possible. Why should young adults care about taxes even if they don’t earn that much?
JAMIE: Well, the truth is that taxes for most people are the largest single expense that you’ll have. I mean, it may be a little bit less when you’re younger, but ultimately, taxes become your biggest expense even more than housing, depending on your personal situation. So taking the time certainly, and in your twenties and thirties to really understand the tax system, making sure you’re taking advantage of the various deductions and credits is really a good investment to really reduce the amount of tax that you legally have to pay for the rest of your life.
ROB: Jamie, a few basics. When are your taxes due for the 2022 tax year and what is the consequence of filing late if you owe the government money?
JAMIE: Yeah. The basic deadline for most people is usually April 30th. You do have a bonus day this year. April 30th falls on a Sunday. So you have an automatic extension till May the first. That being said, if you have any self-employment income like gig income, if you are driving for one of the, you know, rideshare services, things like that, your actual deadline is June the 15th. However, if you owe taxes, they are still due by May the first, now as long as you file on time. Even if you don’t pay, there’s no penalty. There’s obviously interest charged on amounts that you owe. But if you are late following your tax return, there’s an automatic penalty of 5% for the amount that you owe, plus 1% a month for every month you’re late thereafter. So you really want to be very careful. You want to try to file on time, especially if you owe money.
ROB: What if I don’t file a claim? What is the downside?
JAMIE: Well, to be honest with you, the biggest risk of not filing is missing out on government benefits. There’s a lot of government benefits that are tied to filing a tax return. And I would say the biggest one is for people who have children. You really want to make sure if you’ve got one, two or three kids, whatever, that you file a tax return, because that entitles you to the Canada child benefit, which is a tax free amount that is substantial depending on your income level. If you don’t file a return, you’re not getting those benefits. There’s other secondary benefits that you might get depending on the province. You might get the climate action quarterly payments, you may get a GST HST quarterly amount. So there are a bunch of benefits that are directly connected to the return. But of course, as you know, if you owe money and you don’t file the return, there could be penalties, there could be interest. And in very severe situations, you know, if it comes down to tax evasion, that could be criminal. So I think that’s rare, but it’s very important to file a return. You have an obligation to file a tax return in Canada. Every individual, if they owe tax. And I think that’s something that people should do.
ROB: When should I file my first return? How old? Should I have a job? What are your guidelines?
JAMIE: Generally speaking, people should start filing tax returns. I would say once you’re at least 19 years of age. And the main reason for that primarily is the eligibility for the GST, HST quarterly credit. So I know that when my kids reach the age of 19, I help them file their first tax return so that they are eligible to get that quarterly amount. So I think that’s kind of the earliest that I would start assuming that you have no other income.
ROB: Okay. Jimmy, you’re a pro tax guy. What do you think about using all the free tax software out there? And when should I see a tax preparer or accountant?
JAMIE: Yeah, look, I mean, I personally use the software myself. I mean, I use a paid version, but I mean, it’s a phenomenal amount. It’s well below $100 for the software. But, you know, my situation might be more complicated than the average person. There’s a lot of great packages. The Canada Revenue Agency maintains a list on its website about free packages and pay packages. Again, again, you can trial and error. I mean, I think it’s a great exercise that everyone should look at their own tax return themselves and see, you know, how it works and understand the credits and deductions. But I would say, look, if you just have a basic T four slip or an RSP, it’s pretty easy to do it yourself, right? A lot of the software, especially the paid software, will actually have an interview process and questionnaires where they’ll sort of walk you through, you know, Did you move homes in 2022? If so, by the way, there’s a first homebuyers credit, right? Know things like that that you may not know if you’re just doing it on your own. I would say that if you have self-employment income, gig income, you have a rental property, you’re renting out your basement, you know, anything like that, that might be the time that you speak to a tax professional or a tax preparer, at least because of all the expenses. What you can write off, you know, portions of your home, different expenses, things like that. I think that’s where things get a little bit more complicated.
ROB: We’ve talked about accountants and tax preparers. What’s the difference?
JAMIE: Well, again, accountants are professionals that have extensive training beyond university and college. They have a degree specifically, they have a professional designation in accounting. And they would be more on the advice side. So, again, they’re going to be more expensive, but they’ll really hopefully not just prepare your return, but give you some advice and tips of what to do proactively. Terms of Saving Tax. Tax preparers pop up everywhere in the months of March and April, right across Canada. These are usually storefronts. There’s a couple of big chains there, of course, people would know about. But they’re everywhere. They’re in the local malls. They’re in the local strip malls, things like that. And it’ll be a lot less expensive to get it done there. They’ll do a very good job. And prepare your return. They may not be as proactive in terms of giving your general tax advice for the years ahead.
ROB: What are the most common things that we should be tracking through the year? And I’m thinking of charitable donations, moving expenses. Can you give me just a broad list that you think would be relevant to, you know, millennials and Gen Z, that age group?
JAMIE: Yeah, I mean, the easiest ones, as you’ve mentioned, certainly are things like charitable donations. Some charities give you receipts immediately, so if you make a donation in February, you’re going to receive the same day by email often. So I actually have a folder in my email called Donations where if I make a donation during the year, I will file that electronic receipt and then at the end of the year I have all those receipts, medical expenses. You know, that’s a big one. People forget, you know, things like a massage qualifies as a was done by an empty person qualifies as a medical expense and most provinces so the opportunity there to you know, when you get a massage keep that receipt. You know, obviously if it’s reimbursed partially through your, you know, medical program, your health benefits, obviously that’s not eligible. But anything above that is a valid medical expense. So, again, keep a folder for medical expenses throughout the year. If you go to the dentist, you know, things like that. And obviously if you’re self-employed and you have your own expenses, it’s also important to track those. For example, myself, I’m an employee, but I work from home and what I do is I track all my expenses from my home office and I keep that, you know, every single month when the bill comes in for the Internet or the bill comes in for hydro and gas, I track all those throughout the year so that at the end of the year I can do a quick calculation and determine the percentage of the space and I’m using and determine whether or not it’s worthwhile using the the detailed method to write off my home office expenses.
ROB: Can you give us a super concise account of how to claim home office expenses when you’re working for a company and not for yourself?
JAMIE: Yeah, if you’re an employee and you’ve been working primarily from home due to COVID in the last few years, then effectively there are two ways to do it, at least as far as 2022 goes. There’s the detailed method and then there’s a simplified method. For most people, particularly if you own your own home, then it makes much more sense, probably to use the simplified method. That’s $2 a day for up to 250 days. That’s a $500 deduction. You don’t need to keep any receipts. You don’t need to calculate how much space you’re using in your home. And the reason why that works really, really well. For homeowners. Is that the biggest expense that a homeowner has is, of course, the mortgage. Mortgage interest mortgage principal are not eligible deductible expenses under the detailed method. On the other hand, if you are a renter, your biggest expense is probably your rent. So the ability to write off a portion of the rent may lead you to choosing the detailed method instead. Under the detailed method, you calculate all your expenses for your place, and that includes rent and any other expenses that you pay. And then you prorate that. Based on square footage and based on the number of hours worked. If it’s a shared space, stop using the kitchen table and you’re working 37 and a half hours a week.
And obviously there’s a lot more hours in the week that you might use the kitchen for like eating. Then you have to prorate not just based on square footage, but based on timing as well. In both cases, you’re going to need a copy of that 2200 form from your employer authorizing the workspace from home.
ROB: We’ll be back with tips for people working in the gig economy after the break.
Jamie, what tips do you have for people working in the gig economy? And I’m thinking as we go through the year, what should I be tracking? What should I be keeping tabs on so that when tax time comes, I’m really organized and I max out the tax benefits of being a gig worker.
JAMIE: I think there’s two sides, of course, to being the gig worker. There’s the revenue side and there’s the expense side. And we often focus purely on the expense side. You know, keeping track of all the expenses that you incur to earn that gig income. But let’s not forget the revenue side as well. Has the ability ultimately, if they’re suspicious, that you’re not reporting all of your income. Right. Because this is not tracked by at4 slip in most cases. Right? By an employer because you’re self-employed, keep track of that revenue. So it’s very, very important that, you know, if you get money deposited into your bank account on a regular basis, that you know the source of that money. So if CRA ever asks for bank records, you can actually go through your bank statements and identify a note that wasn’t gig income. That was a gift from my parents on my birthday, you know, things like that. The good news is in Canada, we don’t have any type of gift tax. So in other words, if you receive any type of gifts or financial assistance from a parent or other relative, that is simply nontaxable, that is non reportable. So in other words, assuming it’s not employment income and you’re not, you know, doing, you know, type of employment, then any type of gifts that you receive are just freebies. But it’s important to track those, right? So the CRA comes down and looks at your account later and you’ve got all these lump sum amounts coming in there. You want to make sure that you can prove that those are actually gifts and not sources of employment income that should have been reported on your tax return.
ROB: Can you give us an overview for people who don’t understand the basic concept of how business expenses can offset taxes owing on the money you make in the gig economy?
JAMIE: Sure. So if you’re working in the gig economy and you’re, you know, let’s say, have various expenses that directly relate to earning that income. So let’s say you are a consultant and you have to, you know, buy supplies, office supplies, things like that. A big presentation for this consulting income. Obviously, you’re going to charge revenue. Let’s say you earn $500 of revenue from this consulting gig, but you had to go to, you know, the local, you know, stationery store and buy, you know, computer supplies and paper and all kinds of things like that. You can actually deduct those expenses directly from the revenue that you’re earning from that particular job, and that reduces your net income and that’s going to save you tax come tax time. So it’s really important to associate any expenses that you had within reason, because people have tried to, you know, push the limit on questionable expenses. You know, certainly when it comes to personal expenses, you know, things like eating or, you know, things like that, it’s usually personal expenses. But that being said, like, you’re taking out a potential client that you could earn, you know, gig income from writing off, you know, 50% of that meal as a deductible meal and entertainment expense is a valid deduction. And that will reduce the amount of tax you pay on that income at the end of the year. The biggest challenge I’ve seen when people come to aggressively deducting expenses, you know, are things around things like the motor vehicle. So people claim to be using their car for work a lot more than they actually are. And they look at the percentage of, you know, the use of their car. You’ve seen people use, you know, 70%, 80%, you know, things like that. If you’re going to use your car and write off the expenses associated with using a motor vehicle for work, you better be sure that you have a log. And the CRA is pretty very strict on that. So you want to log all your kilometers that you’re driving for work with destinations. The purpose of that trip versus the kilometers that you’re driving personally. So that’s the biggest red flag are the things that I often see is people trying to write off personal meals. They take their spouse or partner out for lunch, they discuss their work and they try to write off. That is not a valid expense. So I think you got to be very, very careful, especially when it comes to meals, entertainment and the use of a motor vehicle.
ROB: I guess the thing to be thinking about all year long is not just how much am I making, but how much my spending to earn this money and to maximize all the potential out there to to offset income and pay less tax.
JAMIE: Absolutely. And probably the easiest tip that I can suggest for that is keeping a separate credit card. That’s the best advice that we have. So you have two cards. It doesn’t even have to be a business card. You just have a regular card and you have another card and you use separate cards for your business expenses. It makes it so much easier at the end of the year because then you’ve got a complete statement where everything you’ve charged to that particular credit card obviously is a deductible expense. Of course, it’s important to make sure you pay off that credit card balance every month. You don’t want to carry any balance there and have to pay interest. But assuming you have the discipline to do that, it is probably a good idea to have a separate card just for business expenses so that you can easily track those throughout the entire year.
ROB: Okay, Let’s say that you filed your income taxes and you realize you made a mistake. What are the consequences? How do you fix it?
JAMIE: It’s actually a lot easier than people think. I mean, it used to be that you had to go back and refile the return and pay someone. It’s not like that anymore. In most cases, you can actually go online if you have a log in to CRA’s “my account”. You just log in. I think everyone should have that, hopefully, and you can actually adjust your return and you simply type in the line number of what you want to adjust and and you just do it all online and then you’ll get a reassessment, you know, a number of weeks later, either allowing it or disallowing your change.
ROB: I’m going to strongly recommend to everybody that you set up a my account, because not only can you monitor your tax return, how’s it been received as your notice of assessment has been issued, Are they okay with what you file? You can also check your RRSP contribution room and it keeps track of your TFSA contributions as well. So it’s a great hub of information about your taxes and other things. Jamie, this is the time of year when people are making RRSP contributions and they’re doing it with an eye on their taxes. But for our audience, twenties and thirties, what do you think is the better bet? In most cases the RRSP or the TFSA?
JAMIE: Well, also just neither in just about a month’s time, because we might have a new option, right? The new first home savings account. I’ll talk about that in a second. But look, I would say for most people that are just starting off their careers, if your income is relatively low and I mean like under $50,000 a year, you’re probably better off doing the tax free savings account contribution to the extent that you can afford it rather than the RSP. And the reason for that is that you’ll pay tax right now at your relatively low tax bracket between 20 and 25%, depending on your province or territory. And ultimately, you know, when you retire, maybe in 30, 40, 50 years, you could be actually in a higher tax bracket. You can’t be any lower than the lowest bracket. So, you know, I think TFSA’s would trump RRSP for most people, certainly if they’re in the lower tax brackets. But as I hinted at earlier, starting in the next couple of months, we’ll have the introduction of the new first home savings account. And I’ll suggest that there’s any remote possibility that you might want to buy your first home. The opportunity then to contribute $8,000 a year for up to five years into a first home savings account, gives you a tax deduction and allows you to take that money out tax free if you buy a home within 15 years. I think that’s a new option that people will have to start considering come the spring or summer when those plans start to become available.
ROB: And I think we should point out that there’s no real downside to these accounts, because if you don’t buy a house, can’t the money go into your RRSP?
JAMIE: Absolutely. There is no downside. So with the end of the 15 years or by the time you’re turning 71, whichever comes first, you actually don’t end up buying a home. No problem. You can take the entire amount and either take it out or pay tax on it if you want the money or even better, roll it into your RRSP or RRIF, which allows you to grow tax deferred forever and you don’t even have to have any RRSP contribution room to do so. It’s like getting an additional $40,000 plus growth of RRSP room. So I think everyone should examine the new first home savings account, Assuming that you’re a first time homebuyer, which is defined as someone who does not own a home in the current year and the previous four calendar years.
ROB: Jamie, I’m going to close on a very technical question, but it’s one that keeps coming up over and over as you immerse yourself in taxes. What is the difference between a tax deduction and a tax credit?
JAMIE: Well, that’s a critical one, right? Tax deductions for most people are much more valuable than tax credits. So tax credits are fixed at a fixed rate federally and provincially. So, for example, federally, you get a 15% credit for various things like medical expenses, you know, all kinds of other things like the basic personal amount, the spousal amount, pension income credit, they’re all worth 15% federally and they’re worth 5% in Ontario. So, you know, very limited deductions. However, our deductions write off your income at your marginal tax rate. So if someone’s in the highest bracket in Ontario at 53% and they get a $1,000 RRSP deduction, they’re going to save 53% tax on the value of that deduction. Whereas if that thousand dollars was a medical expense and was eligible for the credit, they’re all going, oh, they’re going to save about 15% federally and 5% in Ontario. So only 20%. So big, big difference. Of course, for someone in the lowest tax bracket, there’s probably no difference in a deduction in a credit. The only other thing to keep in mind, as all credits are at the lowest other than that donation credit. Once someone makes more than $200 a year of charitable donations, cumulatively in a particular year, and that credit rate jumps up to the top rate of 29% federally. So there is an opportunity there in charitable giving to give more than $10 a year. But other than that, credits are usually worth very, very little compared to deductions depending on your tax bracket.
ROB: Jamie, thanks so much for all this. You are a fountain of tax knowledge the way you’re just writing In off all these numbers and terms. Very impressive. Thanks again.
JAMIE: My pleasure.
ROMA: Now, that was a crash course in taxes with some excellent insights like the renters can sometimes benefit more from that home office deduction. Now, there is some good news for renters in an expensive markets. Rob, what are your key takeaways from this conversation?
ROB: 1) You’re potentially leaving money on the table by not filing a tax return. As soon as you start earning money from a job, even a part time job.
2) Get in the habit now of gathering all your tax slips and checking for all the tax deductions you qualify for. As your income grows through your career. Saving on tax will matter more.
3) Free tax software is out there. Just Google it. The Canada Revenue Agency lists 4 free options for your smartphone and more for online.
ROMA: Thank you for listening to Stress Test. This show was produced by Kyle Fulton and Emily Jackson. Our executive producer is Kiran Rana. Thanks to Jamie Golombek for joining us.
ROB: You can find Stress Test wherever you listen to podcasts. If you like this episode, please give us a five star rating on Apple Podcasts and share it with your friends.
ROMA: Next up on Stress Test, we talk about fertility treatments. It can be a huge expense for couples desperate to have kids and given one in six Canadian couples struggle with infertility. It’s a cost that could pop up if having kids is on your radar.
ROB: Until then, find us at the Globe and Mail dot com. Thanks for listening.