I have not done my taxes.
I have not really thought about doing my taxes.
But now that we’re 2 weeks from the due date (which is April 30th #taxfact) it’s time to get in a tax frame of mind.
So here are 10 tax ‘tips’… a culmination of all the wisdom I gained by doing the opposite of every single one of these things.
Take what you will from them, but please remember… I’m not an accountant, or a tax expert. Everyone’s situation is different and if you’re not sure… check with a professional.
1. You don’t need to be a tax expert, but you do need to understand the basics
Sometimes things are simpler than you think.
Not taxes.
Taxes get pretty darn complicated, and I understand that most people don’t want to spend hours reading the CRA website (even though it has some lovely videos).
You don’t need to know everything, but you do need to know the basics.
For a complete run down of the basics (and how understanding them can help you buy that puppy you’ve always wanted) go HERE:
But if you just want a refresher here are three main bits you should understand:
What a deduction is and how it works:
Deductions reduce the amount of income that you have to pay tax on.
What a tax credit is (and how it’s different from a deduction):
Credits are applied directly to that amount of tax you have to pay.
How marginal tax rates work:
Marginal tax rates mean that as you earn more, the amount of tax you pay increases, but that doesn’t mean that when you hit a new bracket you pay a higher percentage of ALL your earnings, just the dollars that are in that bracket.
Check out this example.
MORE ON MARGINAL TAX RATES HERE
2. Just because someone told you it was a deduction… doesn’t mean it’s a deduction
There are all kinds of crazy stories out there about what is a valid tax deduction. It’s not really that surprising, because some of the rules get into a murky gray area.
As a first line of defence try this handy tax deduction flowchart, but remember… if you’re not sure… check with a tax professional.
Have some problems with my flowchart? Click HERE for some more info on how I put it together.
3. If you want to deduct something… you need a receipt
The CRA won’t let you deduct something unless there is an actual receipt.
So the question is… what counts as a receipt? Well, I’m so glad you asked!
Credit card statements are not a receipt.
Bank records are not a receipt.
A can come in lots of formats but it has to have this information:
Taken from the post: Breaking down a Receipt
I fully acknowledge that some of the stuff on this receipt is probably important if you’re a big time business like Shoppers Drugmart. But when you’re just a simple little arts business, you can boil things down to the essentials.
More questions about receipts? Check THIS out!
4. Want to pay less tax? Try donating to charity OR an RRSP
There’s lots in the news about the ways that super rich people reduce their taxes. Sadly many of those options aren’t open to we normal folks… but there are still a few ways that you can reduce the amount of tax you owe.
Two of the ones that I’ve used in the last few years are:
- donating to charities (which feels great)
- and using an RRSP (which also feels great)
If those sound interesting you can read more about how they work here:
5. If you travel a lot for work, you might be able to claim food costs WITHOUT receipts (take that number 3)
I know I just said you always need a receipt…. but last year someone showed me a simplified method that some of you might be able to use.
I travel a lot for work, and am often away for long periods of time on gigs. The CRA has a rule that allows you to deduct a set amount for the times that you’re away on work AND you don’t need to provide receipts.
Awesome right?
The max amount for 2015 is 51 dollars a day!
All you might have to do is provide proof that you were working (in my case I’d use the contract for the gig that includes the dates that I was there).
The strange thing about the simplified method is that I keep going back and forth on whether it’s actually allowed. I went down the rabbit hole digging into this last here (for the full R2R story go HERE) and since then…. some accountants say it’s allowed and some wouldn’t recommend it.
CHECK WITH YOUR ACCOUNTANT!
And if you wanted to check the CRA website for yourself, you can find it HERE
6. If you’re not deducting it… you don’t need the receipt
One of the reasons I finally started dealing with my money was royally screwing up my taxes, and so I’ve lived in fear ever since.
I’ve kept better records, hired an accountant and I ALWAYS got a receipt. It’s tax 101 right?
You can read the whole story here.
Well… it’s a great habit to get into… but it’s also completely unnecessary if you’re not planning to claim it as a deduction.
I was spending hours every tax season going through receipts that were for non-deductible things. I had to sort through piles of them… it was really dumb.
If you’re not going to deduct it, you don’t NEED to keep the receipt (of course if you use a lot of cash, receipts can be good for keeping good spending records, but these days with bank statements and credit card statements… I don’t have much use for them).
It’s just taking up space in your life
7. If you’re making more than 30,000 dollars IN YOUR SPECIFIC BUSINESS you need to have an HST/GST number
I didn’t think as a singer I had to have an HST number.
And so I didn’t get one until a very nice, but firm, woman called and informed me that I was being back taxed for the last year and a half (I told you I learned all these lessons the hard way).
Do you need an HST number?
You’re only REQUIRED to get one if you’re making more than 30,000 dollars in your chosen business.
So for me that means my music business.
If I was earning 30,000 dollars working a desk job, and a few thousand doing gigs on the weekends… I wouldn’t need one.
I haven’t written a full piece about it yet, but if you think you may apply, talk to an accountant.
It’s a really easy process to get a number (you just call a number and answer a few questions), and it’s way worse to get the phone call after a few years of ignoring it.
8. A meal isn’t deductible just because you mentioned ‘business’
I’m talking a lot about deductions, but it seems to be the most commonly discussed tax topic, especially with the self-employed.
My ‘deduction flowchart’ gets a little fishy on food so let’s see what the CRA has to say.
‘Reasonable’ hmmmm…
This is why the world of deductions is a crazy place.
I think what they’re really asking is for you to use common sense. Things are deductible when they’re a necessary part of your business… if this meal doesn’t fit the bill… it may not be deductible.
For one of my favourite posts that I’ve ever written about taxes (and a few specific examples on food deductions) go HERE.
9. Accountants are the most wonderful people in the world
This is the hottest tip of all.
I don’t do my taxes. I feel like I could probably take a good stab at them now, but what I love is having a tax ally… if anything would ever go wrong *knock on wood*… I’d have someone in my corner.
My accountant answers all my silly questions, and (in my opinion) is worth every cent.
It’s the best money I spend all year.
I’m not saying that you can’t or shouldn’t do your own taxes, but I don’t think it’s a waste of money to find some help.
10. Don’t try to fool the CRA.
Just don’t do it.
When it’s just you and your tax forms… you can technically write whatever you want.
I remember the feeling of using Turbotax and seeing the giant TAXES OWING on the right side of the screen.
That number was scary.
But as I put in more and more deductions… it got smaller.
That felt good.
It’s so tempting to keep that feeling going, and make that number shrink and shrink and shrink.
“They’re probably deductions… I’ll be fine” you think.
You’ll send it away, and maybe they’ll send you the big ole refund that you ‘qualified for’.
You win taxes!!!
Until the slow lava creep of the CRA takes another look at your tax return. Maybe they find a few red flags, or maybe you’re just get selected randomly.
There are plenty of horror stories of how bad things get when an auditor finds one or two suspect deductions, no matter how small. All of a sudden she/he is looking over every single thing with a fine tooth comb.
The stories are crazy, so please believe me when I say… it’s not worth the potential stress. It’s really not worth the potential financial hit.
Pay the tax you owe, and sleep better at night.
What’s the best tax tip that you’ve picked up on the way? Any system or tool that you wish you had when you were starting out? Pass it along!!!
Great points here! Taxes are pretty terrible to deal with, and most especially for freelancers. Thanks for these tips on how to navigate tax season as a freelancer!