Tax Planning

FINA38050 Tax Planning 1  

Lesson 1

Chapter 2 (Notes)

Procedures & Administration

Introduction: Para 2-1 to 2-7:

The CRA – Canada Revenue Agency has the responsibility for carrying out the tax policies that are enacted by Parliament, and the main individual in charge of the CRA is the Commissioner of Revenue/Minister of National Revenue.

Administration of the Department: Para 2-3

• The Minister of national revenue is responsible for the CRA and is accountable to Parliament for all of its activities
• The CRA has a Board of Management which oversees all aspects of the management of the CRA.
• However, the CRA Board is not involved in all the activities of the CRA; such as the administration and enforcement of legislation.
• The CRA Board is denied access to confidential client information.

Returns & Payments – Individuals: (Para. 2-8)

Requirement to File:

The ITA (income tax act) requires an individual to file a tax return if they:

1. owe taxes for the year;
2. they have taxable capital gains for the year;  
3. they disposed of capital property for the year;
4. they have an outstanding balance under the homebuyers’ plan (HBP) or the lifelong learning plan (LLP) discussed in Chapter 10.

These are compulsory requirements; anyone in any of these categories who does not voluntarily file a return may receive a “demand to file” from the CRA.

Para 2-9: There are specific filing requirement regarding non-resident individual; these will be discussed in Chapter 20 part of next week’s lesson on “Liability for Tax.”

Para. 2-10: As for Canadian residence all individuals 19 years of age or older should file a tax return whether or not they income during the taxation year. Sometimes one may not have any taxes payable to the CRA and think they do not have to file a tax return. Quite often these individuals may be entitled to a refund through credits such as the GST and Provincial Tax Credits.

Para. 2-11: Individuals can either file a paper return or file their return electronically. One advantage of electronic filing is that an individual who is entitled to a refund usually receive their refund more quickly that a paper filed return. Electronic filing has cut down on errors compared to paper filing. Hard copy documentation is not filed with an electronic return. However, they must always be retained in the event that the CRA request to see them.

Para. 2-12: Taxpayers have two means of filing their T1 return electronically:

• Efile – Professional preparer
• Netfile – individuals file directly to the CRA by internet

Para. 2-13: For 2013 taxation year approximately 26.1 million individual tax returns were filed. Of these approximately 76% of the tax returns were electronically filed while 24% were paper filed.

Due Date for Individuals Returns Para 2-14:

For individual taxpayers the tax year is the calendar year, Jan 01 to Dec. 31. The filing deadline is April 30th following the end of the taxation year, except when April 30th falls on a weekend.

Self-employed: Para. 2-15 & 16: 

If a taxpayer is self-employed or is the spouse or common-law partner of such a taxpayer, their filing deadline is June 15th. However, if there is any tax owing it must be paid by April 30th to avoid penalties and interest charges.

Deceased Taxpayers:

Para. 2-17: For a deceased taxpayer who dies between Jan. 01 and Oct. 31, the same deadline of April 30th applies.

If someone dies between Nov. 01 and Dec. 31 there is an extension of the deadline to 6 months after the date of death.

If someone dies between Jan 01 and April 30th and their return for the prior year has not yet been filed, they too are allowed and extension to 6 months after the date of death. Their return for the current year will have a deadline of April 30th the following year.

Withholdings – (Source Deductions): (T4 Slip & TD1 Form)

(Paragraph 2-20) Laptop use required to access forms from the CRA website: www.cra.gc.ca 

Certain sources of income require specific deductions including income tax be withheld before the taxpayer receive this income through source deductions. Income tax withheld by an employer is related to the amount of the individual’s income.  It is difficult for the amount of tax withheld to be always equal to the exact amount of tax payable for the year. As a result of this taxpayers would either owe extra tax when they file their annual tax return, or they would be entitled to a refund that they would only receive if they file a tax return.

The amount of income tax withheld by an employer is based on a TD-1 form, completed by the employee. (See Para. 2-21) 

Para 2-22:  Also on Form TD1 an employee can ask to have the amount withheld increased beyond the required amount. This is an important strategy if an individual has more than one employer simultaneously.

Para 2-23: Individuals may also file a request with the CRA to have the taxes-withheld-at-source reduced. In situation where credits are not listed on the TD1 form (such as RRSP) contributions, a request can be filed using form T1213 to have taxes deducted at source reduced.

Para. 2-25 Other Payers): list other types of payments from which the payer must withhold certain amounts. Deductions may be withheld from employment income; pension benefits, RRSP withdrawals and income received from other Government programs. In the case of pension benefits especially Governments’, a taxpayer will have to specifically request that taxes be withdrawn before the cheque is forwarded to the taxpayer. RRSP withdrawals require specific amounts of taxes be withheld.

A taxpayer who is self-employed or who receive substantial income from investment or rental sources will not have any deductions withheld. They must be mindful of this fact, and so possibly make instalment payments, or utilize other deductions, which will reduce their tax liability.

Instalment Payments for Individuals: (Para. 2-27)

Tax payment to the CRA is required to be paid on a quarterly basis by some taxpayers. Individuals who are usually in this situation are the self-employed and those with a substantial portion of their taxable income originating from sources where there are no taxes withheld. Income from investments and rental property are examples of such sources of income.

Para. 2-30 & 31:  The instalment threshold is $3,000 except in Quebec where it is $1,800. So a taxpayer owing more than $3,000 to the CRA will be required to make instalment payments.

Para 2-32 - Installment Due Dates for Individuals: These payments are due on March 15th, June 15th, September 15th and December 15th. Interest and penalties will be charged on late or deficient payments.

Determining Amounts of Instalments:

Para. 2-33 & 2-34:  In trying to determine the amount of instalment to be paid, estimates may be required. There are a variety of approaches (3) one may use.

1. ¼ of the estimated net tax owing for the current year
2. ¼ of the tax owing for the preceding year. The third approach does not involve estimates.
3. The first two payments Mar. & June are based on ¼ of total taxes paid two years prior. The Sept. and Dec. payments are based on ½ of the excess of the taxes payable in the preceding year over the amount paid in Mar. & June.

Para 2-41: Review Example of Instalments for Individuals

When Interest is charged?: Para. 2-43

Interest is charged on any unpaid outstanding balance immediately after April 30 (May 01.), whether or not the taxpayer is self-employed or not.

Rate of Interest: Para 2-46

There are a number of provisions in the ITA, which requires the use of an assumed rate of interest; so in order to implement these provisions tax regulations specifies a prescribed rate of interest.

See chart at Para 48: 

Penalties (Late Filing): Para 2-50

For the first offence, there is a late filing penalty amount of 5% of the taxes owing at the filing due date, plus 1% for each month to a maximum of 12, that the balance owing remains unpaid. Interest will be an additional charge.