Filing a tax return by paper can be complicated nowadays. My brother-in-law has a friend living in Chimacum, Wash., who contacted the U.S. Internal Revenue Service to request a single blank copy of the U.S. personal tax forms from a prior year so that he could revise an old tax return.
Three weeks later he received the forms in the mail. They were for the wrong year. Even worse, the forms came in two shipments totalling 48,000 copies of the tax forms with instructions. The Canada Revenue Agency could have just as easily made this mistake.
Tax-filing tip No. 1: Don't request paper tax forms. File your return electronically. Now, consider these additional six tips to make sure your tax season is not a costly one:
Compare your tax return with prior years
Once you're done preparing your tax return, compare it – line by line – with your tax return from last year and the year before. Income, deductions and credits don't change much from year to year for most people. If you notice big differences between your return this year and your prior returns, ask yourself why. You might just find a mistake made on your return this year, or in a prior year. If you made a mistake in the past, you may be able to recover taxes paid by filing an adjustment for the prior year, using Form T1-ADJ.
Avoid penalties for filing late
The filing deadline for tax returns is generally April 30. Be sure to file by this date if you owe taxes. Failing to file on time will result in a penalty of 5 per cent of your taxes owing, plus 1 per cent for each month your return is not filed, to a maximum of 12 per cent. The penalties could be double this amount if it's your second time failing to file on time in the past three years. Even if you haven't got the cash to pay your taxes owing, file your return to avoid these penalties. By the way, your filing deadline is extended to June 15, 2015, if you or your spouse or common-law partner reports any self-employment activity on either return (if you owe tax, the balance is still due by April 30 if you want to avoid interest).
Remember less common forms
Some forms are due on the same date as your tax return and shouldn't be forgotten. If you had net capital losses in 2014 and hope to carry back those losses to one of the three prior years, file Form T1A by the due date for your return. Likewise, if you have foreign assets with a total cost of $100,000 or more, Form T1135 is due, and Forms T1141 and T1142 may be due if you made transfers or loans to, or received distributions from, a non-resident trust. Finally, if you sold a property designated as your principal residence in 2014 you might have to file Form T2091 (see my article dated April 12, 2012).
File a tax return for your kids
If your kids earned any income in 2014, file a tax return for them, regardless of their ages. Although they may not be required to file if they aren't going to owe tax, reporting earned income will create valuable contribution room for a registered retirement savings plan, which will help them save tax later when they are in a position to contribute. Further, once a child has reached age 19, he may be entitled to cash back in the form of a GST or HST credit just for filing a tax return.
File in the U.S. if you must
If you're a U.S. citizen living in Canada you're required to file a tax return in the United States each year. The good news? You may be entitled to the "foreign earned income exclusion," which, for 2014, will shelter from tax the first $99,200 (U.S.) of income earned outside the U.S. The bad news? You won't be entitled to the exclusion unless you file a U.S. tax return. U.S. citizens living abroad have an automatic extension to June 15 to file a tax return.
Pay your taxes as soon as possible
If you haven't got the cash to pay your taxes owing, the CRA will charge you interest on any unpaid balance. The current rate on overdue taxes is 5 per cent, which is historically low, but if you can borrow at less than 5 per cent, you may be better off borrowing to pay your tax bill.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.