A certain amount of folklore has developed over the years around the income tax system and the filing of tax returns, but many of those age-old perceptions are no longer accurate.
Here are 10 tax-filing myths and the facts that could mean extra money in your pocket — or at least prevent you from running afoul of the Canada Revenue Agency's rules.
Myth 1: A big tax refund is a good thing.
Many taxpayers look forward to the month of May, because it's when they get a big fat refund from the Canada Revenue Agency (CRA). Because so many people contribute to charities or RRSPs, or have major child-care expenses or alimony or maintenance payments, a significant number of tax returns generate refunds — more than 58 per cent in the 2013 tax year, according to the CRA.
But when the refund is large — and the average refund in the 2013 tax year was $1,696 — the experts agree: that money would be better off in your hands for all that time rather than the government's.
"Take steps to ensure you're not lending money to the government at zero per cent interest," says Jason Heath, a Certified Financial Planner at E.E.S. Financial Service in Markham, Ont.
"Tax refunds should be avoided by filing form T1213 with your employer to reduce your tax deductions at source if applicable."
Myth 2: Barter transactions are tax-free.
Dozens of barter networks have sprung up across Canada and the United States in the past few years. They can be a great way for people to swap something they have but don't need for something they need but don't have.
It's not just goods that can be bartered. Services can also be swapped. No cash changes hands in these arrangements; many clubs use credit units that have a nominal value. Barter networks that specialize in business-to-business deals have attracted many members.
But one thing these networks and barter clubs won't give you is a way to escape all taxation. The CRA takes the position that barter transactions are just like cash transactions — and therefore subject to tax. It's all spelled out in the CRA's Interpretation Bulletin 490.
Basically, the CRA says the value of any goods or any service you offer must be added into your income if they're the kinds of things you normally earn income from. So, if you're a dentist and you offer to extract some wisdom teeth in trade for a new set of snow tires, you must add the amount you would normally charge for a wisdom tooth extraction to your taxable income.
The good news is that if you offer to help your neighbour with a plumbing job in return for his first-generation iPad, the tax department isn't interested.
Myth 3: Income from joint accounts can be claimed just by the lower-income spouse.
Tax educator and author Evelyn Jacks, founder and CEO of the Winnipeg-based Knowledge Bureau, says many people think the lower income spouse can always claim all the interest or dividend income from a joint account.
"The claim must be prorated," she says. "If only one spouse in a family works and is the source of all the deposits, then all of the interest earned on the account is taxable to that person."
So, if each spouse contributed half the money to the account, each should claim half the interest.
Jacks points out that this prorating rule applies no matter whose name is on the account or the T5 slip.
|Federal tax brackets — 2014 tax year|
|Up to $43,953||15%|
|$43,954 – $87,907||22%|
|$87,908 – $136,270||26%|
Myth 4: You can withdraw money tax-free from your self-directed RRSP.
Thousands of Canadians have faced costly reassessments over the years after falling victim to promoters' claims that there are easy ways to make tax-free withdrawals from an RRSP.
Typically, the sponsors of these schemes promise that people can use their self-directed RRSPs to purchase shares of a private company. The money used to purchase the shares is then loaned back to you at low or no interest.
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The CRA warns that if you use your RRSP to purchase shares of a private corporation and the shares are not a qualified investment, then the value of the shares will be added to your taxable income.
"If you respond to these kinds of advertisements, you risk losing your retirement savings and the tax benefits of the RRSP," the CRA says in a tax alert.
The only ways to make tax-free withdrawals from one's RRSP are through the Home Buyers' Plan or the Lifelong Learning Plan. Both of these programs have strict rules, and both require people who take advantage of them to eventually repay everything they took out or face a tax hit. There's no free lunch here.
Myth 5: I don't need to file a tax return, because I don't earn enough money to pay income tax.
Unfortunately, many Canadians believe this and therefore miss out on what could amount to thousands of dollars in benefits and credits like the GST/HST credit and the child tax credit. These days, the tax return is also a benefits return — people need to file a return to be eligible for these credits.
Is income tax unconstitutional?
In 2011, a tax protester in Ontario was fined $522,000 after being convicted of tax evasion.
The penalty represented 150 per cent of the federal taxes evaded.
He was also given a one-year conditional sentence, ordered to remain in Ontario and surrender his passport, and perform 180 hours of community service.
Tax protesters often argue that Canada's income tax laws are unconstitutional, a claim the courts have consistently rejected.
Low-income seniors who qualify for the guaranteed income supplement should also file to ensure that they continue to get the supplement. Otherwise, they'll have to file a separate renewal application.
In the same vein, low-income earners who got working income tax benefit payments last year have to file a 2014 return to be eligible to receive them in 2015.
Teenagers with part-time jobs should consider filing, too.
"By filing returns in the case of kids only earning small amounts, you can establish earned income for future RRSP contributions," says Ernst & Young executive director
Gena Katz. She also points to refundable provincial credits that are available for no- or low-income earners. But again, no return filed, no credit.
Myth 6: If you don't have the money to pay your tax bill, there's no point in filing before this year's tax filing deadline of April 30.
If you can't come up with the taxes owing by April 30, file on time anyway and pay later. The CRA imposes a five per cent penalty for filing late.
It also charges a one per cent interest on your balance owing for each full month that your return is late, for up to a maximum of 12 months.
Myth 7: I just found a charitable donation receipt from two years ago that I never claimed. I guess I'm out of luck.
Au contraire. You can claim a charitable donation receipt — once — going back five years.
Myth 8: I can't file my tax return until a missing T4 slip turns up.
All of your employment-related income slips have to be issued and sent by the end of February. If you never got a slip (or the dog ate it), you should contact whoever issued it and ask for a duplicate.
If that doesn't work, don't wait so long to file your taxes that you pay the five per cent late-filing penalty that kicks in after May 1. Estimate how much you think you made and attach a note to your return saying you weren't able to get your slip and giving the name and address of who should have given you that slip. The CRA can penalize employers who issue slips after the deadline.
Myth 9: I deliberately didn't declare a lot of income a few years ago, but if I come forward now, I'll risk a serious fine or jail time.
The Canada Revenue Agency has a Voluntary Disclosures Program that thousands of people with guilty consciences apply to take advantage of each year.
It says 14,624 applied in 2013-2014, a decrease of almost four per cent from the previous year. People disclosed approximately $813 million in unreported income.
The CRA has said in the past that the rise in voluntary disclosure reflects increasing pressure from Canada and other Western countries on tax havens to relax their laws relating to bank secrecy and to disclose information about accounts held by foreigners trying to evade tax in their home countries.
As well, a number of whistle-blowers from within these banks have disclosed records from these institutions to tax authorities in other countries.
People who haven't filed a return for years or those who didn't declare income can come clean and not be liable for penalties or prosecution (although they will have to pay interest and the taxes owed).
There are a few crucial conditions. For one thing, the disclosure must be complete. For another, it must be made before the tax department starts snooping into your affairs. Once you know they're on to you, it's too late to 'fess up. The program allows for "no name" disclosures through an authorized representative.
Myth 10: You can often make a deal with the CRA to pay less tax than you owe.
People may wish that they could negotiate to pay, say, half of their tax bill and call it a day. But the CRA says it generally doesn't allow people to do this.
Here's how the CRA put it in an email to CBC News: "While the CRA has a certain amount of leeway to help taxpayers who find themselves in particularly difficult circumstances, Canadian legislation allows for forgiveness of actual tax debts only in very precise and limited situations, and only as specified by law."
So, what are those situations? The CRA says they include:
- Remission under Subsection 23(2) of the Financial Administration Act where "the collection of the tax or the enforcement of the penalty is unreasonable or unjust or that it is otherwise in the public interest to remit the tax or penalty."
- A proposal made by a bankrupt or insolvent person, a liquidator, a trustee or a consumer debtor under Section 50 or 66.12 of the Bankruptcy and Insolvency Act.
- A reorganization plan agreed to by a debtor company and its creditors under Sections 4 and 5 of the Companies' Creditors Arrangement Act.
- A recovery plan agreed to by a farmer and his or her creditors made under paragraph 5(1)(a) or (b) of the Farm Debt Mediation Act.
The bottom line is that you likely won't get a break unless you're facing extreme financial hardship and are on your way to bankruptcy or something close. If you aren't, the CRA says you'll have to pay every cent of the principal you owe.