Learning about Taxes 2012 Edition Our main character, Paul, is a 17-year-old high school student who spends most of his free time with his friends Omar and Anya. Paul doesn't really know anything about income tax although he has heard his parents talk about it. To earn some extra money, Paul has started a part-time job at a local store. He works after school and on weekends. Paul works 12 hours a week and is paid $10.00* an hour. After two weeks of working, he is looking forward to getting his first cheque for $240.00 (12 hours × $10.00 × 2 weeks). He has already decided how he is going to spend his money. On payday, Paul stops by his work with Omar to pick up his cheque. When he opens his pay envelope, he is disappointed to find that instead of getting $240.00 …he only received $206.59. "What's going on?" Paul asks, "Some of my pay is missing.” They have taken $33.41 in deductions." Paul shows his pay stub to Omar and there are deductions for employment insurance (EI) and income tax. Paystub for Paul’s Job "What are these deductions for, like this EI?" asks Paul. "I think they are taking money from your pay for some different taxes," offers Omar. "Well, I don't know, but I am going to ask around. I want to find out where my money is going," says Paul, who is now determined to learn about taxes. "I would also like to know where this whole thing of making people pay taxes got started." "I don't understand this stuff," replied Paul, "What are income tax and employment insurance?" Tax is a mandatory payment made by individuals and corporations to government. It can be levied upon things such as income, property, and sales. Taxes are used to support the government and the programs and services it provides. Federal taxes are used for programs such as National Defence, Old Age Security, Canada child tax benefit, and transfers to provinces and territories Provincial and territorial taxes used for services such as bridges and highways, education, hospitals, and wildlife conservation. Municipal taxes for services such as police, ambulance and fire services, libraries, parks and playgrounds, public transportation, and garbage and recycling collection. The federal expenses for the fiscal year of 2011-2012 A tax system is defined by six characteristics: 1) who pays the tax 2) the tax base 3) the rates to be applied to the base 4) general exemptions 5) general deductions 6) other measures, such as how tax is to be paid Video #1 – Introduction to Taxes In Canada, there are various taxes, tariffs, and duties. The common Canadian taxes and salary deductions: income tax; employment insurance (EI) premiums; Canada Pension Plan (CPP) contributions; provincial sales taxes (PST); and goods and services tax/harmonized sales tax (GST/HST). Paul and Omar now go to the bank where Paul deposits his cheque and takes out some money to go shopping. They head to the mall to buy video games. On the bus, the subject of taxes comes up again. "So, if some of my money is taken off my cheque for these deductions, how come they didn't take any money off our cheques when we did that landscaping job in the summer?" Paul asks Omar. "My dad told me that I am supposed to file a tax return at the end of the year and I might have to pay some taxes on that money then," replied Omar. "You're going to have to file a return too you know.“ Income tax is tax collected on behalf of the federal, provincial, and territorial governments. The amount of income tax that you must pay is based on the amount of your taxable income (money earned minus allowable deductions) for the tax year. Income tax is collected in various ways. Paul's employer has deducted income tax from his pay and remitted it to the Canada Revenue Agency. This is called a source deduction because the tax was deducted directly from Paul's income by his employer. Paul didn't have deductions taken from his summer landscaping job because in his particular case, he was not considered an employee (he and Omar were helping Omar's neighbour build a patio and landscape his backyard). Employment insurance (EI) provides temporary financial assistance to unemployed Canadians who have lost their job through no fault of their own, while they look for work or upgrade their skills. EI premiums have been deducted from Paul's wages. If Paul becomes unemployed, he may be entitled to EI benefits. The Canada Pension Plan (CPP) provides contributors with income when they lose income because of retirement, death, or disability. In the event of death, the plan provides benefits to the contributor's survivors. CPP contributions are not being deducted from Paul's wages right now because he is under 18. However, when Paul does turn 18, his employer will begin to deduct CPP contributions from his pay. When Paul and Omar get to the gaming store they check out the latest games. Paul decides to buy one new game. When the cashier rings up the sale the total is $67.19 Paul says to the cashier, “But the price sticker on the game says $59.99." The cashier checks the receipt and responds, "Yes, that is how it rang up....$59.99 plus tax." "Oh, I forgot about tax," says Paul. He pays the cashier and hurries out of the store with Omar, to go catch the bus home. Video #2 - Do I have to file? What do I need to file my taxes? Even though Paul may not have to file a tax return, he may want to. By filing a tax return, he could qualify for a tax refund, credit or benefit. Anya, Paul and Omar take the bus to Omar's house and on the way they begin to discuss taxes again. "So, you said earlier you might get money back if you filed a tax return. How does that work?" asked Omar. "I'm learning about taxes as I go," said Paul, "but I'm fairly sure that if I paid too much tax I'll get a refund." Video #3 – Sources of Income Refunds You are entitled to a refund if you had too much tax withheld during the year. "I know some people get money for other reasons. My mom gets a payment called the GST/HST credit," said Paul. "Also, you know Ali's sister Fatima?" asked Paul. "Well, Ali told me that she gets the Canada child tax benefit to help with the cost of raising her baby." "We have to find out if we can get something as well," said Omar. Paul is not sure if he will owe income tax for 2012. However, he is hoping to get a refund and is planning to file a return. "I sure could use a refund myself, right now," said Omar. "How do I file a tax return anyways?" Generally, income tax returns are due by April 30th Therefore, Paul and Omar should file their 2012 tax returns between mid-February and April 30, 2013. You need a T1 General. A paper copy can be obtained from a Canada Post outlet. Filing options The CRA encourages all Canadians to file their taxes electronically to reduce costs, achieve greater accuracy and faster processing, and be environmentally friendly. The CRA's electronic tax-filing services are known as NETFILE and EFILE. You can also mail a paper tax return to your tax centre. It usually takes about four to six weeks to process paper returns and two weeks to process returns filed using NETFILE and EFILE. "So what happens after you file your tax return?" asks Anya. "What if you make a mistake or forget to claim something? What if you don't agree with whatever changes they made on your tax return?" "Then I guess I can tell them that I don't agree with them," responds Paul. "I think you should find out if you can do that, just in case," says Anya. After the CRA processes your tax return, we will send you a notice of assessment showing any changes or corrections made (such as identifying and correcting a math error). The notice will indicate if you are entitled to a refund or if you have a balance owing. Paul wants to get his refund as quickly as possible so that he can buy a new skateboard. He has decided to start direct deposit, one of the electronic services the CRA offers to individuals. How the CRA gets information From: 1) employers 2) financial institutions 3) organizations that pay interest or dividends (like banks) 4) and those making payments to non-residents of Canada. Completing a Personal Tax Return TD1 To file a paper return, you will need the following: The General Income Tax and Benefit Guide the T1 General, Income Tax and Benefit Return forms specific to your province or territory of residence. all of your information slips (such as, T4, T5 and T2202A slips); information relating to any amounts to be included in income that were not reported on an information slip receipts for any deductions or credits that you intend to claim paper, pen, pencil, and an eraser; a calculator (to find the calculator on your computer, click the Start button, then select Programs, then Accessories and Calculator) Video #4 - Preparing to file Now, let's take a look at Paul's return! A few days later, Paul went to his uncle's house to prepare his return. He didn't pick up a tax return at the post office so he is going to download one from the CRA Web site. "We will begin with the T1 General 2012, Income Tax and Benefit Return, and the Schedule 1, Federal Tax. If we need any other forms or schedules, we will get them then," replies his uncle. Paul takes a look at the return he downloaded, "How will I know what to fill in?" he asks. "Every part of the form is labelled, usually with a line number," his uncle replies. "You will fill in the lines that are right for you as you go along. We can look in the General Income Tax and Benefit Guide if we need to get more information on how to complete a line.” "So, because each line has a number, I can look it up in the guide?" asks Paul. "That's right," replies his uncle. "Now let's get started. Do you have your T4 slip?" Paul should become familiar with the information on his T4 slip before he starts to complete his return. Employers should issue T4 slips by the end of February. If you have not received, or have lost or misplaced a slip for the current year, you have to ask your employer, or the issuer of the slip, for a copy. Let's take a look at Paul's T4 slip to find the following information: the employer's name; the year in which the income was earned; Paul's name and address; Paul's social insurance number (box 12); Paul's employment income (box 14); employment insurance premiums deducted (box 18); income tax deducted (box 22). You will notice that box 28 is marked with an "X". This shows that Paul was exempt from paying Canada Pension Plan contributions during the past year, since he was under 18 years of age. We will now follow along with Paul as he completes page 1 of his return. Fill in your name and address Add which province you lived in as of December 31, 2012. Add your SIN, birth date and language you prefer and then add marital status Check the box(es) if you are a Canadian Citizen or the box for Elections Canada if you are old enough to vote and want to be on the voter’s list. Paul ticks “No” on the GST/HST box. He is not eligible for the credit, as he will not reach 19 years of age before April 1, 2014. Paul gathers the information he needs to calculate his total income for last year. He has his T4 slip from his employer and after checking his bank records, he has determined that he made $500 last summer when he helped landscape Omar's neighbour's backyard. He is ready to start completing page 2 of his return. Paul ticks No as he did not own any foreign property during the year. Paul enters his income from box 14 of his T4 slip on line 101, and the $500 he earned landscaping on line 104. Paul does not have any other income to enter so he can now calculate his total income on line 150. This is Paul's total income. He adds the amounts on lines 101 and 104 and enters it here. Paul is now ready to calculate his net income and taxable income on page 3 of his return. He copies his total income from line 150 on page 2 to line 150 on page 3 Lines 206-232 Paul does not have any deductions for 2012. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncmtx/rtrn/cmpltng/ddctns/menu-eng.html Lines 234 and 236 - Since Paul has no deductions, he enters the amount from line 150. The amount on line 236 is his net income. Line 260 Paul enters the amount from line 236 here. This is his taxable income. NoteYour taxable income is the amount you use to calculate your federal tax on your Schedule 1, and your provincial or territorial tax on Form 428. Before he can complete page 4 of his return, Paul will need to complete Schedule 1 to calculate his federal tax. Schedule 1 is used to calculate the non-refundable tax credits and the federal tax on taxable income. It is divided into three sections: Step 1 - Federal non-refundable tax credits; Step 2 - Federal tax on taxable income; and Step 3 - Net federal tax. Step 1 - Federal non-refundable tax credits Non-refundable tax credits reduce your federal tax. However, if the total of these credits is more than your federal tax you will not get a refund for the difference. This is why they are called "non-refundable". Paul enters the basic personal amount of $10,822 on line 300. Note You can claim the basic personal amount if you live in Canada throughout the year. If you immigrate to Canada or emigrate from Canada during the tax year, the basic personal amount you can claim is based on the part of the year that you were resident in Canada. Line 312 - Paul enters $26.35, the amount from box 18 of his T4 slip as he can claim the employment insurance premiums he paid in 2012. Line 363 - Paul enters $1,095 as he has employment income of $1,940 (line 101 plus line 104) and is eligible for the Canada employment amount. Note The Canada employment amount you can claim is $1,095 or the total employment income reported on line 101 and line 104, whichever is less. Line 364 - Paul enters $600 ($50 × 12 months) as he can claim the public transit amount for his monthly bus passes. Note You can claim the total amount paid for public transit passes for 2012. This includes the cost of monthly passes or of longer duration such as an annual pass for travel on public transit. Let's take a look at Paul's Schedule 1 Line 335 - Paul does not qualify for any other federal non-refundable tax credits so he adds up the amounts and enters the total here. Line 338 - Paul multiplies the amount on line 335 by 15% and enters $1,881.50 here. Line 350 - Paul copies $1,881.50 here. This is his total federal nonrefundable tax credits. These are his calculations . Step 2 - Federal tax on taxable income Line 32 - Paul enters his taxable income which he calculated on page 3 of his return. Line 33 - He enters $1,940 in the first column since his taxable income is less than $42,707. Lines 37 and 39 – Paul calculates 15% of $1,940 and enters the result ($291). He will use this amount to calculate his net federal tax. Step 3 - Net federal tax Lines 40 and 42 - Paul enters the $291 he calculated in Step 2. Lines 43 and 47 - He enters $1,881.50 (the amount of his non-refundable tax credits he calculated in Step 1). Line 48 – Paul subtracts line 47 from line 42. The result is a negative amount so he enters "0". Line 58 - Paul enters the amount from line 48 here. Paul's calculations show his net federal tax to be zero. For more information about net federal tax, see Line 420 - Net federal tax. Paul can now continue on to page 4 of his tax return. Line 420 - Paul enters "0" from line 58 on Schedule 1. Using Form 428 for his province or territory of residence, Paul determines his provincial or territorial tax on line 428 also to be zero. Note Amounts calculated and entered on lines 428 and 479 vary for each province and territory. For the purpose of this example, Paul's provincial and territorial amounts are zero. For information about the provincial or territorial tax and credits for your province or territory, see Provincial and territorial tax and credits for individuals. Line 435 - Paul adds the amounts on lines 420 to 428 and enters "0". This is his total payable. Total credits Line 437 - Paul enters $211.28 income tax deducted, from box 22 of his T4 slip . Line 482 - Paul adds the amounts on lines 437 to 479, and enters $211.28. These are his total credits. Refund or balance owing Paul is now ready to find out if he has a refund or a balance owing. He subtracts the amount on line 482 from the amount on line 435. Line 484 - Since the result is negative, Paul enters the difference here. This amount is his refund. Line 485 - If the result had been positive, Paul would have entered the amount here as a balance owing. Direct deposit - Start or change area - Paul fills in his information so his refund can be deposited directly into his bank account. Note If you calculate a balance owing when completing your return, the amount is due no later than April 30, 2013. You can make your payment in several ways. Now that Paul has completed his tax return, he signs it and adds his telephone number and the date . Filing Options Electronic filing If you file your return electronically you do not need to send your tax information slips, receipts or other documents used to prepare your tax return. You are still required to keep your receipts for six years in case we ask to see them. Paper filing If you are filing a paper return you should attach the following: one copy of each of your information slips; your Schedule 1; your provincial or territorial Form 428 and any other supporting forms, schedules, or documents that apply to your return (the explanations in the guide will tell you when to attach additional documents). Avoiding penalties and interest Records Generally, you should keep your supporting documents for six years. Have the receipts and documentation to support your claim ready in case you are selected for review. Note If a tax professional will be preparing or sending your return to the CRA, show him or her all of your supporting documents, such as your information slips and receipts. Conclusions, Where can you get help?