We’ll be the first ones to admit that the Canadian tax system is more than a little convoluted and complex. In fact, we’ve written entire articles on if and when Canada should consider scrapping its current system for one that’s simpler to understand. Unfortunately, a new, better tax system doesn’t appear to be on the horizon, so here are a few missteps you’ll want to avoid as you try to navigate the mess.
Interest Income in Joint Accounts. Unless an account is tax sheltered like a TFSA, you’ll owe taxes on any interest you earn during the year. It’s a common myth that either of the joint owners whose name is on the tax slip may report the interest on the joint account. However, in reality the person who earned the money must report it. This is particularly important when one person is contributing significantly more capital to the account. The income in the account has the be divided based on the capital provided by each contributors. However, our advisors can help you find useful tax tools and solutions, like having the low-income spouse take a loan from the high-income spouse to invest in their own name.
Employment Insurance Income. While employment insurance income may not be top of mind for many of our clients, it becomes more important as they begin to plan expanding their families and considering parental leave. A common misstep by many Canadian families is not claiming maternity leave as income, but all EI benefits, including maternity, paternity, and parental benefits, are taxable. Service Canada may automatically withhold some of the EI payment to cover the tax obligation, but it’s rarely enough, and most Canadian families will face some tax obligation at the end of the year.
Understanding Your Notice of Assessment. Another common misstep we see from many Canadians is assuming that receiving a Notice of Assessment is the same as CRA saying they’ve audited your taxes and found everything to be correct. This simply isn’t the case. A notice of assessment is a very quick evaluation done by the CRA to ensure there aren’t any common arithmetic errors. It doesn’t mean that the CRA has validated everything you’ve submitted, and the tax agency can choose to review and audit your file within three years of you filing your taxes.
At MacMillan Estate Planning, we understand that many of our affluent clients come to us because they are paying excessive amounts of tax. Our tax planning experts can help you reduce your overall tax burden, defer unnecessary taxation, and avoid the many missteps that look like tax saving opportunities, but aren’t. Contact our advisors to schedule your free consultation today.