It’s Tax Time: What to Keep in Mind
It’s April and that means it’s tax time. If you haven’t completed your income taxes yet, remember that most Canadian income tax and benefit returns for 2016 are due April 30, 2017. However, since April 30 is a Sunday this year, the Canada Revenue Agency (CRA) will consider filings and payments on time if they are received or postmarked by midnight on May 1.
People who are self-employed (or whose spouse or common-law partner is self-employed) have until June 15, 2017 to file. That said, if you owe money on your taxes, you still have to make your payment by the April 30/May 1 deadline.
Filing Canadian Taxes if you are Self-Employed
If you are self-employed, there are several other important considerations to keep in mind.
If you earned self-employment income from a business you operate yourself or with a partner, you have to report that income. No matter how much money you make as a freelancer or self-employed person, you’ll need to report it to the CRA. You may not have to pay taxes on it, depending on your income, but you’ll still need to list it on your tax returns.
Depending on your income, you may have to pay taxes in installments. This is determined by your province or territory of residence. If you live in Quebec on December 31 of a year, you may have to pay in installments if your net tax owing is $1,800 or more. In any other province, use a limit of $3,000 of net tax owing.
If you have to pay tax installments, you will receive a reminder from the CRA. One reminder will be sent out in February for March and June payments and another will be sent in August for September and December payments. If you receive an instalment reminder and are required to pay instalments but do not comply, you may end up having to pay interest and penalty charges.
Another important thing to remember is that, as a self-employed individual, you won’t have income taxes taken out when you get paid. This means you will have to put aside some of your income to ensure that you have money available to pay your taxes when they’re due. As a general rule, it’s a good idea to put aside about 25% of your income for taxes.
Paying Your Taxes
If you have a balance owing on your taxes, you will want to pay it when the payment is due. Otherwise, you will be charged interest. For example, if you have a balance owing for 2016, the CRA begins to charge compound daily interest starting May 1, 2017, on any unpaid 2016 amounts owing. If you have amounts owing from previous years, the CRA continues to charge compound daily interest on those amounts.
In addition, if you owe taxes and do not file your tax returns on time, you will be charged a late-filing penalty. Therefore, even if you cannot pay your tax balance in full when it is due, you will still want to file your return on time to avoid payment this penalty.
If You Cannot Pay Your Taxes
If you cannot pay your taxes when they are due, it is important that you still file. As mentioned, this can help avoid a late-filing penalty. It’s also important to let the CRA know that you are having problems paying your taxes. They may arrange a payment schedule for you. This will allow you to make smaller payments over time until you have paid the full amount owing, as well as any applicable interest.
You may need to show that you have tried to pay your tax debt in full and were unable to. The CRA may ask for proof of income, as well as proof of expenses, liabilities, and assets.
If you are in a situation where you cannot pay the taxes that are owed, even on a payment schedule, you may be able to ask for relief from penalties or interest. However, in general, the CRA will not reduce the principal amount owing.
To apply for relief of penalties and interest, you will have to establish that the interest and penalties resulted from circumstances beyond your control. Generally accepted circumstances that may warrant relief are:
- Extraordinary circumstances beyond your control (such as natural or human-made disasters, serious illness or accident, or serious emotional and mental distress)
- Actions of the CRA (such as processing delays or errors)
- Significant financial hardship (loss of employment, interest charges that represent a significant portion of the payments, proof that paying in full would cause a prolonged inability to provide the basic necessities for yourself or your family, etc.)
- Other circumstances (The CRA may grant relief in other circumstances that are not listed)
It’s important to know that the CRA can garnish your wages and even potentially seize your assets if you do not pay your tax debt and do not cooperate with the agency. That’s why it’s important to be proactive, and communicate and cooperate with the CRA. If you are unable to pay your taxes, you may wish to speak with a financial professional for help.