Learning about Taxes
2013 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?