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Taxes aren’t fun for anyone, all that paperwork can make you go crazy! What’s worse is, after you sift through all the paperwork, you may have to pay a large tax bill. In order to avoid hefty taxes, it is helpful to be aware of the tax credits and other tax benefits available to Canadian consumers, regardless of whether you do your own taxes or work with an accountant. You can bring your tax bill down substantially by keeping receipts for the purpose of claiming tax credits when tax season comes around.
Difference between a tax credit and a tax deduction? Find out here.
Why Do I Need to Keep Receipts for Taxes?
There are two reasons you need to keep receipts for tax purposes. The first reason is so you know exactly how much to claim on your taxes when tax season comes around. It can be incredibly frustrating and time-consuming to search for an old receipt you received a year ago. Plus, if you don’t know the actual cost, you can’t exactly claim it on your taxes.
The second reason is you need supporting documentation in the event that you get audited by the Canada Revenue Agency (CRA). The CRA has the right to audit anyone’s taxes, this can involve looking at the supporting documentation you used to prepare your tax return. If you can’t provide receipts to back up what you claimed on your taxes, the CRA has the right to remove whatever it is you were trying to claim which could result in you owing additional taxes.
Does owning money to the CRA affect your credit score? Check out this article to find out.
What If I Lose or Haven’t Saved a Receipt?
If you lost a receipt or forgot to saved one, don’t panic, you have options. Your first option is to use bank statements as evidence of the transaction. The CRA readily accepts bank statements as proof of a transaction’s occurrence. This could include a bank account or credit card statement.
If you paid the expense by cash, you can’t use bank statements since the transaction won’t appear on the statement. If this is the case, you can try to estimate the expense. This is quite easy to do if it is a recurring expense. For example, utility and phone bill amounts are generally the same amounts every month. If you’re off by a few dollars in your estimate, it won’t significantly sway your tax calculation. The CRA will usually accept an estimate to fill a gap in your receipts, especially if you are only missing one out of many receipts for a recurring cost.
Finally, if the expense was paid by cash but was a one time expense, you may run into some problems. Your first course of action is to reach out to the vendor and ask for a copy of the invoice or receipt you’re missing. This is quite easy to do if the amount was paid to an established business. If you can’t get a replacement copy of the missing receipt, you may be out of luck. The CRA can’t help you if you have no documentation or a reasonable way of estimating the expense.
How Does The CRA Decide Who They Audit?
Usually, the CRA selects a sample of Canadian taxpayers every year to audit. There are simply too many Canadians to audit each person every year. Their sample tends to include high-risk taxpayers. High-risk taxpayers are those who have irregular cash inflow, such as waitresses or cash based sole proprietorships. If you’re employed by an established business and obtain a direct deposit paycheque, you’re relatively low risk to the CRA because there is a reliable paper trail. The CRA also tends to audit people with complex tax returns that could cost them a lot of money if the tax return was done incorrectly.
Types of Taxation in Canada
In Canada, there are three main types of entities which are all taxed differently. Regardless of which entity you are, you still need to keep your receipts for deductible expenses and tax credits, you are merely just taxed in a different way. Below is a summary of the three entities.
- Individual & Sole Proprietorships. If you are a person who is employed by a third party or have your own business that is not a partnership or corporation, you are an individual or sole proprietorship in the eyes of the CRA. Individuals and sole proprietorships are the most common type of tax entities in Canada. This article covers the tax credits applicable to this type of tax entity.
- Partnerships. A partnership is a business that is not incorporated and is created between two or more people.
- Corporations. A corporation is a separate legal entity that is independent of its shareholders and owners. A corporation can be created provincially or federally.
You should keep your taxes and receipts organized for the purposes of completing your tax return easily and for a potential audit. Taxes are already complicated enough, if you can keep your side of things organized, the process will go much smoother. Below are ways that you can stay organized for tax season.
- Digital Receipt Back-ups. Today, we have the benefit of digital back-ups and cloud storage so documents can virtually never get lost. After each tax year, take the time to make digital copies of all your receipts and store them in a safe spot on your computer or in cloud storage. Keep your paper back-ups just in case, it’s hard to lose a digital and physical copy.
- Label Folders. To help collect and sort receipts during the year, use labelled folders. Every time you incur an expense that is deductible for your taxes, toss it into the appropriate folder.
- Keep Tax Receipts for Four Years. As a general rule, the CRA has four years from the date of your tax assessment to audit you. The CRA recommends keeping records for six years, but they technically can’t audit you after the four years have passed. Keep this in mind when determining how long you need to keep your records.
Is there any benefit to filing your taxes early?
Tax Credits and What Documentation You Need
There are many tax credits and deductible expenses in the Canadian taxation system. Some you may have heard of before and others may be entirely new to you. Either way, be sure to consider the tax credits and deductible expenses to save money on your next tax return.
Deductible medical expenses are one of the more complicated tax credits that the CRA offers. As a general rule, keep all documentation related to health insurance premiums for you and your family and other medical expenses you paid in full. When tax season comes around, you can work with an accountant or refer to the CRA website to determine what is deductible and what is not.
Home and Office Expenses
Do you work from home? If you do, you can actually deduct a portion of your living expenses against your income. Keep receipts related to utilities; home repairs, maintenance, and improvements; rent and other similar fees; internet and phones costs for tax purposes.
6 tax breaks homeowners can benefit from, click here.
Vehicle and Mileage Expenses
Some individuals work for an employer that requires them to drive for work but does not compensate or reimburse them for the vehicle and mileage expenses they incur. If this is you, you can deduct vehicle expenses you incurred while working, but not personal vehicle expenses. The CRA allows you to deduct gas, maintenance and repairs, insurance, license and registration fees and interest paid on car loans.
Also, be sure to keep a record of the mileage you drove for work and have your employer sign off on it. The mileage does not have to be down to the inch, it just needs to reasonably represent the amount of mileage you drove for work. This may seem tedious, but the CRA dings a lot of people for not having this documentation.
Child Care Expenses
While you’re working, you may need to pay for a child care service for your kids so that someone is watching them during your work day. These expenses are usually deductible for tax purposes. Be sure to keep all the receipts and documentation for costs such as caregivers, daycare centers and camps.
One of the great things about the Canadian taxation system is people who obtain an education are rewarded through big tax breaks. Be sure to keep records of all the education costs you incur including tuition, other student fees, textbooks, and other educational equipment. Usually, academic institutions issue a T2202 to their students through a student portal which is a tax document for education, similar to a T4. In addition, interest paid on student loans is another tax credit you can claim.
Believe it or not, if you adopt a child, the related costs are eligible for a tax credit. The fees that can be included in the tax credit are adoption agency fees, legal and administrative expenses related to a child’s adoption and travel.
If you moved for work or school reasons, your moving expenses are deductible. Transportation costs, storage fees, travel costs, temporary living expenses, lease cancellation fees, costs to update legal document addresses (such as a driver’s license) and costs related to selling and buying homes are all deductible.
The Canadian tax system encourages individuals to make charitable donations by offering a generous tax credit. Be sure to get the official charitable donations receipt from the organization you donate to for your taxes. Most charitable organizations will give you the official receipt as soon as you donate. Lastly, if it is your first time making and claiming a donation, you are eligible for a super credit. If you have some extra money at the end of a tax year, consider making a donation for the big tax credit and the pleasurable feeling of contributing to a good cause!
Understanding the tax credits available to you and the documentation you need can save you lots of money in taxes. If you are confused or want to learn more about the Canadian tax system, a good starting point is the General Income Tax and Benefit Guide that the CRA prepares every year. This guide breaks down complicated tax jargon into simpler terms that the average Canadian can understand.
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