Category Archives for "Personal Income Tax"

Large Refund, You’ve Just Paid Too Much

By Randall Orser | Personal Income Tax

Another tax year’s been filed, and you’re excited as you’re getting a huge refund again this year. That’s great! Or, is it? A large refund is really saying you’re not managing your money as well as you probably could. Financially, getting a refund every year may be doing more harm than good. Wouldn’t you rather get that money on each pay cheque, rather than in one lump sum? Hopefully, after you read this you’ll talk to your human resources department, tax preparer, and your financial planner.

What Does That Large Refund Mean?

What you’ve basically done when you get a large refund is loan the government your funds for a whole year without any interest. Why would you do that? You probably wouldn’t loan a friend or family member money without interest, but you give it to the government. Just think of the ways you could use that large refund, even if it’s only $2,000, you could put that money into an RRSP, or TFSA. Or, invest it into non-registered investments to make some additional cash. 

What Should You Do Instead?

If you’re finding that large refunds are a way of life, then you need to figure out what to do so you don’t get those large refunds. The first thing to do is talk to whomever is in charge of payroll at your work: boss, payroll preparer, human resources, etc. 

Get a copy of Form TD1, Personal Tax Credits Return, and go through each section and fill in amounts that apply to you. The TD1 form used to determine the amount of tax to be deducted from your employment income or other income, such as pension income. The payroll person, or your tax preparer, can help you figure out the amount of tax exemptions for which you qualify, and fill out the form. You should do a new TD1 each year.

If you find that your tax situation has changed during the year, you can update the TD1 at any time. Many things could change during the year, such as a marriage, divorce, children aging out of credits or going off to college, which could cause either a balance owing or a large refund.

Now What?

You’ve talked to your payroll department, and made the changes to your TD1. You will start to see an increase in your pay cheque as less tax is coming off. The amount won’t be huge; however, you need to look at the overall view. This is where things can get interesting. Figure out how much extra you’re getting on each pay cheque, and setup a new direct deposit with work for that much to go into a savings account (or even a TFSA). If you can’t do that through work, then an automatic transfer into a savings (or TFSA) account will work too. Whether the amount is $20 or $100, do this each pay, and watch your savings grow.

Getting that large refund at tax time, is not necessarily a good thing, especially if you’re using to pay certain bills that come due at that time, such as property taxes. You’re much better off taking that money for yourself each pay cheque, rather than giving it to the government interest free.

Be Better Prepared for Tax Season 2019

By Randall Orser | Personal Income Tax

I know what you’re thinking, didn’t we just do our taxes, well, yes, but it’s never too late to start planning now for the 2019 season. Maybe you weren’t as organized as you’d like to be, maybe you weren’t able to take advantage of certain deductions, such as RRSPs or employment expenses. Now is the time to think about these things rather than next April.

Get Organized

Start by having a specific drawer, or area of your desk that you keep all your tax receipts you get during the year and use an envelope in which to keep them. This is the best way to ensure you always have the receipts you need to file your taxes. As something comes in, put it in the envelope, and it’ll always be there when you go to do your taxes.

What Did You Miss Last Year

What deductions did you miss out on last year? Did you not make enough RRSPs? Maybe you could deduct your automobile for work but didn’t have all the receipts; or kept track of your mileage. Now is the time to look at where you are as far as RRSPs go and start contributing more. It’s much better to start contributing now rather than one lump sum come February as your money starts earning income right away. 

For your automobile, start keeping your mileage now, and ensure you keep track of all work-related mileage. Every time you get gas make sure you get a receipt, same with any repairs you do to the car, and keep your insurance papers with the amount. If you haven’t kept your mileage until now, do the best you can to backtrack up to January 1st, that includes the beginning mileage for the vehicle.

What Couldn’t You Use Last Year

You may have had capital losses, from the sale of shares, etc., or non-capital losses that you just couldn’t use. If you feel there are shares you wish to get rid of this year, think about doing so to create a gain that you can offset with those losses (the opposite goes here to so if you have some lame-duck stocks and you know you’re going to have gains it may be time to get rid of them). If you had non-capital losses last year, you can carry them forward, to a year you have income. There are limitations so make sure you check them out.

Another thing you may not have used last year were moving expenses. If you moved later in the year or didn’t earn income from your new job or business before December 31st, you can carry forward these to the next year that you are actually earning income. CRA likes to see these expenses deducted from income you earned because of the move and in the year that the income was earned (as long as it’s the following tax year).

Donations can also be carried forward for five years. Donations are one deduction that are best done with a high value. $20 here or $20 there really doesn’t do much for your taxes. Donations work as a non-refundable credit and on the 1st$200 you get 15% of that or $30; over $200 you get a 29% credit. Therefore, it makes much more sense to accumulate your donations until you have over $200 (as long as it doesn’t take more than 5 years). If you are feeling philanthropic then your best bet is to give bigger donations to fewer organizations to take advantage of the tax deduction.

Medical expenses are another deduction that you can carry over to another year. For medical expenses, the end date must fall within the tax year you are filing for; for example, if you’re filing for 2018, then you can have March 2017 to February 2018. For 2019, you don’t have to carry on those dates, however, you would have to use March 2019 to December 2019. 

Doing this split works well when you have a lot of expenses in one part of the year that fall into the next year. Let’s say you’re having a bunch of dental work that starts in November but won’t end until January of the next year at a cost of $10,000. You may be better off claiming it in the following tax year rather than the previous tax year.

The reason for a successful tax year is organization. The better organized you are and have everything ready to go, the faster your return gets done. It also makes your tax preparers life much easier too.

Why Is My Tax Notice of Assessment (NOA) Different Than What Was Filed?

By Randall Orser | Personal Income Tax

Every year after you file your personal income taxes, Canada Revenue Agency (CRA) sends you a Notice of Assessment (NOA). On this NOA, CRA will state any information that relates to changes made during their processing of your return, what any carry forwards for non-capital and net capital losses will be, information on your current TFSA, and what is your next year RRSP contribution limit.

Occasionally, you find that something has been changed by CRA due to information they received that you perhaps didn’t get, such as an additional slip, or carry forwards you may have forgotten about. It could also have been a mistake during the preparation of your return.

The most common mistake we find is the missing slip. You had more than one job in the tax year, or non-registered investments that send out a slip you don’t get or that slip comes after you’ve done your taxes. Even with the new auto-fill return feature, not all slips will who up, as they may not get processed by February 28th, and can show up on CRA’s system much later in March.

If you do have non-registered investments, allow enough time for those slips to come before you file your taxes. T3 Statement of Trust Income Allocations and Designations slips are the last slips you’ll usually receive. I find it best to wait until Mid-March or later to do your taxes, if you get any kind of slip for non-registered investments. Those slips usually come on a T3, T5, T5008.

Another slip that is commonly forgot about is the T4RSP, which is a slip you receive when you take money out of your RRSP during the year. It is amazing how many people forget they did this, do their taxes, and then get a NOA very different from what they thought it would be. This can be a major difference depending on how much you withdrew, and what was your income for that year.

For those of you that still paper file, yes there are still people using paper, addition errors are the biggest mistake. Double, and triple, check your addition and subtraction. Make sure that you have the correct figures before you send in your return. A good idea is to do it in pencil (never file your return in pencil) first then do it over in pen. If you’ve paid based on what you’ve filed, and you file too close to the deadline, you may be charged penalties and interest if the balance owing goes above what you already paid, and CRA processes your return after April 30th.

Your installment payments are another item that can make your NOA different from what you filed. Sometime in February you get a statement of installments paid that apply to the prior tax year. It’s best to make sure you get this statement before filing, and call CRA if you don’t have it by March. Always ensure exactly what you paid for installments for the prior tax year before filing your taxes.

When you do get your NOA check it and compare it to what was filed. If you used a tax preparer, send it to them, so they can see what happened after your return was filed. It’s important to check your NOA so next year you know for what to look when you go to prepare your next year’s taxes. Today, your tax preparer can get your NOA almost as soon as they file, which is pretty cool.

What You Need to Know About Tax Reviews

By Randall Orser | Personal Income Tax

Today, Canada Revenue Agency (CRA) is doing more “reviews” than audits these days, though, let’s face it, it’s just a fancy new name for audit. CRA would have you believe that these reviews are just them ensuring that you’re paying your fair share of taxes, though that doesn’t make it any less stressful for you. Most taxpayers won’t have to worry about a tax review, however, if you are one of those worrying about such a review, here are some tips to make it a smoother process.

Tax Preparation

If you maintain accurate records over the year, your tax review should run smoothly, or you may avoid one completely. By keeping good records, you have ready access to the information you need to complete your tax return. Rather than putting it off until the end of the year, or worse, when you’re doing your taxes, keep pertinent receipts and documents in some kind of file, envelope, etc. By keeping them handy and in the same place, you won’t forget items that should go on your tax return.

Red Flags for Audit

There’s certain things that are more than likely to trigger a review than others; CRA also has years where it looks at certain things over others. By paying attention to what you are doing, you should be able to avoid some of these things:

  • Incomplete tax forms
  • Incorrect SIN for yourself or a dependent
  • Information that doesn’t match your T-slips (T4, T5, T3, etc.).
  • Large amounts for deductions in comparison to your income
  • Consistent large business losses year over year
  • Using non-standard deductions
  • Unusual deductions that you’ve not taken before
  • Listing dependents other than children, parents or grandparents
  • Large amount of medical expenses or donations

You probably won’t have to go through a tax review every year, it can happen. Sometimes it can be as straightforward as remembering to follow the guidelines for completing your tax return, schedules, or to include certain types of expenditures or income. If you want to avoid a review then just complete your return as accurately as possible and keep your documents.

How to Use Your Tax Refund

By Randall Orser | Personal Income Tax

The height of tax season is here, and many Canadian taxpayers are preparing to get large refund cheques. The average Canadian tax refund is about $1,400. Have you filed your tax return yet? Here’s eleven best uses in order to maximize that tax refund.

Pay Off Debt

If you’re finding yourself in debt for credit cards or student loans, it can make your life miserable. If you’re debt load has gotten out of hand, that’s especially true. You can wipe out financial stress and anxiety by using your tax refund to pay down this onerous debt.

Save Your Money

Do you have enough set aside for emergencies? Canadians barely have $1,000 set aside for such expenses. Use your tax refund to start your saving for a rainy-day fund, particularly if you have a difficult time saving.

Take a Vacation

Have you been thinking about that dream vacation, such as a cruise or a European trip? Your tax refund can make that a reality. Your tax refund may not be enough to pay for the whole trip, however, you can probably make a sizable down payment on that dream vacation.

Investing

It’s never been easier than today to start investing. The best part is that you don’t have to pay a broker. You can learn about investing online and create a self-managed account that will allow you to buy and sell stocks any time. 

Put Money into Your RRSP

The perfect time to start your RRSP is now. Even if you’re young, you should make decisions today that will benefit your future. Funding your retirement account takes discipline and consistency. When it comes to your retirement, you’ll be very happy you made the effort now.

Spruce Up Your Home

Does your home need a bit of a makeover? There are economical things you can do to your home to improve it. You can paint, plant a garden, or buy new furniture. With small improvements you can enhance the look and feel of your home.

Start a Business

A smart way to use your money is to start a business. You could quite possible make your dreams a reality, but also create an additional stream of revenue for your family.

Fund Home or Auto Repairs

Have you been putting off any home or auto repairs? That tax refund could go to new brakes, a tune up, broken window, or replace missing roof shingles.

Update Your Work Wardrobe

You’re not Steve Jobs so you probably can’t get away with wearing the same thing every day. Nor do you have to look like a fashion model. You should have clothes that are professional, if you want to advance in your company, you should be paying attention to your professional image. You can use your refund to buy new shoes, dresses, suits, and business casual attire.

Start a College Fund for Your Kids

College is expensive, and the average college student ends up with tens of thousands of student loans. For someone who’s just entering the workforce, that’s a lot of debt. You can make your kids’ graduation a happier time, if you save a portion of your tax refund for them.

Treat Yourself

While it’s important to pay off debt or start a savings account, you should maybe enjoy some of the finer things in life your money can buy. Treat yourself to something special you’ve always wanted with your tax refund. Be it a new fragrance or handbag, buy something that’ll put a smile on your face.

Your tax refund could change your financial picture. It’s crucial that you spend it wisely.

Before You File Yourself, Here’s Some Tips

By Randall Orser | Personal Income Tax

It’s tax time, and that dreaded chore of filing your taxes is weighing on your mind. Do you do it again this year yourself? Filing your taxes is more than just about your T4 or RRSP, there are other deductions you should think about, and some depending on the Province you live in. And, do you file online (preferable) or via paper (takes weeks to get processed and to get your refund)?

Online or Paper Filing

In 2017, 22 million or 90% of income tax filers used online filing and will probably grow to closer to 100% within a couple of years. Even returns for deceased people can now be filed online. Online filing is fast and secure, and generally your return is processed within 8 business days, and you’re refund sent within that time. For faster refunds, use direct deposit.

There usually is no requirement to paper file your taxes anymore, except maybe for someone who’s deceased or a non-resident. If you choose to file via paper, then you need to realize it can take up to 6 weeks to process your return and get your refund cheque.

It makes absolutely no sense to file via paper anymore.

Slips and Receipts

You need to gather up all your T-slips (T3, T4, T4A, T5, etc.), RRSPs, donations, medical expenses, etc. 

Here are some other things to consider:

  • Do you have kids? 
  • Did they go to post-secondary school?
  • Do you have the T2202A?
  • You can only claim the tuition
  • For BC, did they do arts or sports?
  • Do you have the official receipts from the organization?
  • Did you go to school?
  • If you did, then you need a T2202A from the post-secondary institution
  • Did you sell your home?
  • Gather all your documents for your original purchase and the sale of the home.
  • Do you have foreign income?
  • This could be investments you have outside Canada that aren’t on a T-slip.
  • Do you get a pension from a foreign government? US? UK?
  • Do you have investments outside retirement accounts?
  • Did you get a T5008 show shares you disposed of during the year?
  • You need to find out the cost of those shares; talk to your financial planner.
  • Are you or a child disable?
  • Did you file for the Disability Tax Credit (T2201A)?
  • You must have a T2201A on file with CRA in order to claim the disability tax credit.
  • your Social Insurance Number, as well as your spouse’s and children’s.
  • your birthdate, as well as your spouse’s and children’s. 
  • If you’re carrying forward from last year, ensure your address and email are correct.

You may want to:

  • Sign up for direct deposit to receive your refund faster and any benefit or credit payments owed to you, deposited directly into your bank account. Go to www.cra.gc.ca/directdeposit to learn how to sign up for direct deposit.
  • Make sure the Canada Revenue Agency (CRA) has your updated address and direct deposit information before you file. The fastest way to update both is by using My Account. To register for My Account, go to www.cra.gc.ca/myaccount. You can also use this service later to view your tax slip information, look up your RRSP deduction limit, and check the status of your refund or your Canada child tax benefit or GST/HST credit payments.
  • To file online, you need to complete your return using certified software or a certified web application. This may even help you identify benefits and credits that you may have missed if you filed on paper! The CRA has a list of software options-some that you have to buy and some that you can use for free-at www.netfile.gc.ca/software.

Paying Your 2017 Taxes Owing

By Randall Orser | Personal Income Tax

Tax time is once again upon us, and the chore of preparing and paying your taxes is nigh. Remember that the due date for paying your taxes is April 30th. If you don’t file by then, you will get a penalty of 5% plus 1% per month (up to 12 months) you don’t file. Sadly, many people don’t pay because they think they are going to owe, and that’s a big mistake. You’re much better to file your taxes and then work out a payment plan with Canada Revenue Agency (CRA). When filing your return, you may have a balance owing on line 485. Generally, if this amount is $2 or less for 2017, you do not have to make a payment.

Ways to Pay Your Taxes

You can pay in various ways to CRA: 

  • You can wait for your notice of assessment and then pay at your bank. 
  • You can pay using online banking (your SIN is your account number). Note many banks date the payment for the next day if it’s after 3 pm EST).
    • You can also post-date your payment to April 30th or any other date before that.
  • You can us My Account and pay that way and date the payment for anytime before April 30th.
  • You can pay at a Canada Post outlet, though payment make take a couple of days to be processed.
  • If you’re using a tax preparer, they can setup auto withdrawal and you pick the date (before April 30th) for the payment to come out.

What If I Can’t Pay in Full

If you cannot pay the full amount you owe now, take action by contacting the Canada Revenue Agency (CRA) right away. Ignoring your debt does not make it go away. In fact, waiting may make any financial or legal consequences more serious. The CRA may also charge interest compounded daily at the prescribed rate on any amount owing until your balance is paid in full. The CRA will work with you to resolve your tax debt or other government programs debt, though they could change their minds and demand payment in full at any time. 

A payment arrangement is an agreement you make with the CRA. It allows you to make smaller payments over time until you have paid your entire debt including applicable interest. Before you make a payment arrangement, you may need to show that you have tried to pay your debt in full by borrowing money or reducing your expenses. To figure out your ability to pay, we may ask you to provide proof of your income, expenses, assets, and liabilities. You may have to do this by telephone or by completing a financial questionnaire. The Payment Arrangement Calculator lets you calculate payment options and it includes the prescribed Canada Revenue Agency interest rates. The Income and Expense Worksheet will help you to calculate your available net income to pay your debt.

Financial hardship provisions

If your debt repayment makes it difficult for you to pay for housing, food, utilities and other necessities of life, you may qualify for help under the financial hardship provisions.

It is your responsibility to contact the CRA if repaying your debt is causing you financial hardship. The CRA will take your situation into account when reviewing your request.

For more information and to see if you qualify, call 1-866-864-5823

Insolvency or bankruptcy

If you feel you are insolvent or are considering bankruptcy, visit the Office of the Superintendent of Bankruptcy for more information.

Taxpayer relief provisions for individuals

In some circumstances, you may be able to ask for relief from penalties and interest charges and reduce the overall amount you or your business owes. For more information, and to see if your situation qualifies, see Taxpayer relief provisions.


In the end, you need to file your taxes and ensure you pay in full by April 30th. If you find yourself unable to make a full payment, file your taxes and then contact CRA to make a payment arrangement. 

Your First Tax Return

By Randall Orser | Personal Income Tax

Filing a tax return for many people can be overwhelming, however it can feel especially difficult when you’re young filing your first return. You must file a tax return if you’ve earned income during the year, or are entitled to any credits, such as the GST/HST credit, or may be getting a refund. The following tips will help make your transition into adulthood much less stressful.

Collect Your Tax Documents

Any company you worked for during the year should send you a T4 stating the income you earned, and the income tax, CPP and EI deducted. Whether you worked one day or the entire year, if you didn’t get a T4 by mid-March then you need to go back to your employers and find out why. Did you move during the year? If so, you should’ve let all employers know. If you were self-employed, you may or may not get a T4A, so keep track of any self-employed income you made during the year.

Ensure that you have all your financial documents for the year in one folder and keep those safe until you’re ready to prepare your tax return.

Dependent College Students

You tax situation could get a bit harder if you’re a college student, and your parents support you as well. Your parents can claim you as an independent and claim part of your tuition on their taxes, they’re paying for it anyway. You can claim what you need to on your taxes, however, you can transfer (up to $5,000) to them as a deduction on their taxes. Your parents more than likely have the higher income, so it makes sense for them to get the deduction. You need to talk to your parents about your intentions before anyone files their taxes.

File Electronically and use Direct Deposit

Canada Revenue Agency prefers you to file electronically (Efile®) and use direct deposit. Returns that use Efile® get processed much faster than via paper, and direct deposit is way faster than getting a cheque. If you Efile® and use direct deposit you can have your refund within 10 business days as opposed to paper and cheque which can take up to 8 weeks. Depending on the complexity of your tax return, you may have to buy tax software to do this or hire someone to do it; the investment is usually worth the time savings. The advantage to using software or a tax preparer is that they may uncover deductions you didn’t realize were possible.

There really is no reason to file a paper return anymore, unless you’re required by CRA.

File by April 30th.

You need to file and pay by April 30th for the preceding tax year. If you Efile® ensure you file by midnight on April 30th to avoid a penalty. For paper filing, the postmark must be for April 30th, otherwise, it’s considered late. If April 30th falls on the weekend then the due date becomes the following business date, usually Monday. CRA does not give extensions for filing, other than for self-employed individuals of June 15th; if you owe then it must be paid by April 30th. You should file your return on time even if you can’t pay the balance owing right away. CRA charges a penalty of 5% plus 1% per month up to 12 months that a return is past due.

Filing your taxes is not the most enjoyable process, but don’t rush it as you could make careless mistakes. This could cost you in missed refund opportunities, penalties, or other attention from CRA you don’t want. As this is your first time filing, you may want to have a parent or other older adult look over your return, especially if you’re not using software or a tax preparer.

How Do I File My Tax Return?

By Randall Orser | Personal Income Tax

There are a couple of ways you can file a tax return today. You can still paper file, though that is going to disappear within the next 5 years, I believe. You can electronically file using Netfile® for individuals. And, you can hire a tax preparer, such as Number Crunchers®, to prepare and Efile® your return. Note that tax preparers are now required by Canada Revenue Agency (CRA) to electronically file all returns, unless stated otherwise by CRA.

Note that personal tax returns are due by April 30th of each year for the prior year’s filing. Self-employed, or proprietorship/partnership, returns are due by June 15th; however, any taxes owing are due by April 30th. I believe making installments is the smarter way to handle you taxes each year. Yes, the government gets your money early, however, you won’t have a whopping balance on April 30th that you may not be able to pay.

Be Prepared!

That’s not just a Scout slogan, but what you have to be before you file your taxes.

Gather up all your slips T4s, T5s, etc., a copy of last years return, donations, medical receipts, etc. You can register for My Account which gives you online access to your notices of assessment, allows you to make any adjustments to an already filed return, and more. If you need to change your address or direct deposit information (or want to set it up) makes sure you have all that information handy including: old address, new address, bank information, etc. Also, look at the various tax credits and find out if you qualify, and if you do then have all necessary information for those available. For a comprehensive list of what you’ll need to prepare your taxes ask for a copy of our Tax Info Needed sheet.

Paper Filing

You can still paper file (2013) and I believe it will be phased out over the next five years. You can get a copy currently at any Canada Post outlet or go online to CRA’s website and make sure you pick the return for your province. You must fill out the return as required and attached an original copy of all slips (T4s, T5s, etc.), donation receipts, medical receipts, arts credit and fitness credit, public transit receipts (monthly fare card as well as proof of payment), and any other slips/receipts for which you are claiming a deduction or income.

You must either mail or drop off your tax return to your local tax services office. CRA does not accept returns by email

Netfile®

The Netfile® transmission service allows an individual to file your personal tax return directly to CRA, usually via a tax preparation software. You must use a CRA accredited software, and there are some free ones, check CRA’s website. With Netfile® you do not have to send your slips and receipts with the return. CRA will look at your return initially and send you a notice of assessment with your balance owing or refund. Since CRA does not get your slips/receipts with the return, they do ‘reviews’ either during the tax season or after the season (usually September onwards). Generally, CRA just wants proof of any deduction you’re claiming or may want to validate your income.

Netfile® is only for filing the current year tax return (2012 at the time of writing this). You cannot change your address, name or direct deposit information through Netfile®, do that before you file (see Be Prepared!).

The advantages to filing electronically are: faster refunds, it’s generally fast and easy (if you have a simply return), you can file for free (again, if you have a simply return), your information is secure and safe as CRA uses security levels equal to your bank, and filing electronically does not increase your chance of an audit.

Hire a Tax Preparer

The third option is to hire a tax preparer, and one that we recommend for those with a more complicated return, or you just don’t have the time to figure out the software or the paper return and file yourself.

Your tax preparer will have the software to be able to Efile® your return, and has the knowledge to get the job done right. Your tax preparer won’t need your Netfile® access code either as they would have their own account access for filing.

I have found many times deductions for clients they had no idea they were entitled, sometimes saving them thousands of dollars on their taxes. For what it costs to have someone prepare and Efile® your return, can be saved just in the hassle of filing and possible deductions you may have missed by filing it yourself.

Be prepared (see paragraph above) applies even more so with a tax preparer. Please ensure you have all your slips and receipts ready as anything you forget delays your return getting processed. Ask us for a copy of our Tax Info Needed sheet, which covers everything we’ll need to do your taxes.

For proprietorships/partnerships, I believe, it’s more imperative to get a professional tax preparer to prepare your tax return. A professional tax preparer will know what you can and cannot write off for tax purposes, or what deductions are only partially a write off. The three main things CRA looks at with proprietorships are automobile expenses, meals, and home-office expenses. So, you want your tax return to be as accurate as possible.

Filing your tax return is important and you want it to be accurate. Electronic filing is the best way to file your return. I find many people don’t file because they are going to owe taxes. That is a big mistake and can hurt you worse than filing and owing. As long as you file on time, you won’t be penalized, and you will only be charged interest on the balance owing. That is why it is better to make installment payments so you won’t have to worry about a balance owing at tax time.

Capital Gains and Your Taxes

By Randall Orser | Personal Income Tax

When you buy a stock or a mutual fund, you do so in hopes of making a profit. That is why it is so important to keep careful track of not only how much you paid for that security but any income it generates while you hold it. All of those factors go into your cost basis, which in turn helps you determine your true profit.

Computing your capital gain is important, since an inaccurate figure could cause you to either overpay or underpay your taxes. If you overstate your cost basis, you will pay too little in capital gains taxes, and that could invite some unwanted attention from Canada Revenue Agency. If you understate your cost basis, you will pay too much in capital gains taxes, cutting into your profit and leaving you with less money in your pocket.

Understanding Your Cost Basis

Many investors assume that the cost basis of a stock or mutual fund simply consists of the amount they paid, but in fact it is a bit more complicated than that. Many stocks and mutual funds pay dividends along the way, and those dividends are considered taxable income. When you hold a dividend-paying stock or mutual fund, you should receive a T3 or a T5 form each year showing exactly how much you received. You must then include that amount on your tax return, and pay the applicable taxes on that money.

If you fail to factor in those dividend payments, you risk understating your cost basis and paying taxes twice on the same money. When you receive a T3 or a T5 form, you should immediately add the amount shown to the amount you paid for the stock or mutual fund. Continue to add those dividend payments to your cost basis each year, since you have already paid taxes on those amounts. This is assuming you are not receiving cash for the dividends and they are just added back into the investment

Computing Your Capital Gain

The cost basis of your stock or mutual fund consists of the amount you paid, plus any brokerage commission, along with those quarterly or annual dividend payments. Once you have added up all those amounts and determined your true cost basis, it is time to compute your capital gain.

When you sell a stock or mutual fund, you should receive a T5018 form, which shows the amount of proceeds you received (some forms do show the cost and/or adjusted cost base too). Once you know your cost basis, computing your capital gain is as simple as subtracting that cost basis from the gross proceeds.

Once you know the amount of the capital gain, you can simply include it when you file your taxes. If you use tax preparation software to prepare your return, all you need to do is answer the questions about capital gains and use them to see the impact of that gain on your total tax bill.