Save on your Taxes: File on Time. Even If You Can’t Pay the Full Bill Now.

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Hurry up – just a few days left to file your taxes on time!

”The only thing that hurts more than paying income tax is not having to pay income tax,” said Sir Thomas Robert Dewar more than a 100 years ago.

So rejoice that you are on the list of taxpayers and get busy minimizing your tax burden. The deadline for filing your taxes is just around the corner and approaching fast. Let’s have a look at the options that are available to help you meet your liabilities towards Ottawa and your province this year.

On-line filing

Besides the traditional way of filing taxes, it is also possible to do it online through NETFILE, an electronic tax-filing option provided by the Canadian Revenue Agency (CRA). Filing your taxes on-line as opposed to sending it by post is definitely faster, hassle-free and is simply a more convenient way of dealing with your obligations. To file your taxes through NETFILE, you will need certified tax preparation software. You cannot NETFILE your taxes if you have never filed a tax return before or if you are filing for another year other than 2008, equally if you are in bankruptcy or if you are a non-resident of Canada. Due to some technical problems on the CRA side last year, NETFILE users got a tax return deadline extension to May 6. This year all seems to be going well, so no extension is expected. Remember that it is not a crime to owe money to the CRA, but it is a crime to not file a return by the annual due date.

Penalties: no deadline extension

Maybe you are not so interested in how to file your taxes; maybe what really worries you is how to pay the amount you owe. Is it more than you can afford to pay by April 30? You are by far not the only one, and this year especially. It is still useful to file your return on time, even if you can’t pay. As opposed to United States, in Canada there is no way of asking for a tax deadline extension: you will simply be filing late. The penalty for late filing is 5% of your 2008 balance owing plus 1% of your balance owing each full month that your return is late. So if you file on time, you will save a lot of money.

The filing deadline for the self employed is June 15th of the following year – for you and your spouse/common law partner. Although interest on any unpaid tax balance still begins on May 1st, a late filing penalty will not start until June 16th. Your best defense is to make a tax installment on the estimated unpaid balance by April 30th. .

Interest rate and payment arrangements

While just filing on time will save you a packet of money, there are still stiff penalties on the unpaid balance.

A compound daily interest of 5% valid from April to June 2009 is applied to both the unpaid amount owing for 2008 and possible penalties for late filing. Therefore it is always better to pay as much as you can on time and then set up payment arrangements for the rest of the money. But there’s a catch: the CRA will only accept payments arrangements, if “you have reasonably tried to obtain the necessary funds by borrowing or re arranging your financial affairs.” The main point is not to bury your head in the sand and hope that the issue will go away on its own. It won’t. You will find a sympathetic ear at the CRA as long as you are seem to be proactive in meeting your obligations.

Quarterly installments

Unlike salaried workers, where their approximate taxes owing are deducted at source, as they receive their pay check, many self employed, commissioned sales people, and sole proprietorships receive income on which no tax has been withheld. Currently there are three methods available to determine when installments of an individual taxpayer are payable:

  • Government method
  • Prior year option (1/4)
  • Current year option (estimated)

Starting in March 15th, and the 15th of every three months thereafter, you are expected to pay your estimated taxes owing on a quarterly basis. For a variety of reasons many don’t bother paying these installments, which occur whenever your tax owing is greater than $3,000 ($1,800 in Quebec). Unfortunately ignoring this obligation can be costly.

Here is the story and an example from the CRA website:

You may also have to pay a penalty if your installment payments are late or less than the required amount. We apply this penalty only if your installment interest charges for 2009 are more than $1,000.
To calculate the penalty, we determine which of the following amounts is higher:

  • $1,000; or
  • one-quarter of the installment interest that you would have had to pay if you had not made installment payments for 2009.

Then, we subtract the higher amount from your actual installment interest charges for 2009. Finally, we divide the difference by two and the result is your penalty.

Example

For 2009, John made installment payments that were less than he should have paid. As a result, he has $2,500 of actual installment interest charges for 2009. If John had not made any instillment payments in 2009, his installment interest charges would have been $3,200. Since one-quarter of $3,200 is $800, we subtract $1,000 (the higher amount) from $2,500. The difference is $1,500. Then, we divide $1,500 by two. John’s penalty is $750.

So the message is; don’t ignore those quarterly installment notices

Exceptions to penalties and interests

Sometimes, no matter how hard you try, you simply cannot meet the requirements because of circumstances beyond your control. The CRA of course is aware of these situations; therefore they can forgive penalties and interests if you cannot pay due to natural disaster, serious illness or accident, serious emotional distress (death in the family) or financial hardship caused by unemployment. Don’t be overly concerned if you cannot pay for any of these reasons. The CRA does not systematically prosecute individuals or families for late payment of taxes if they are not seen to be acting fraudulently. They are only interested in prosecuting for tax fraud and tax avoidance.