Income tax first came into effect in Canada in 1917, as the government’s response to funding their operations in World War 1. Since 1917, income tax in Canada has expanded to fund government spending.
Fast forward to today: what are your income taxes getting you? Well, have you or someone in your family gotten sick? When you went to the emergency room, were you thinking about a thousand dollar service bill, or were you solely concerned with the care you were receiving? This is one of the benefits of paying income taxes that may not be obvious, but is ever present in Canada.
Taxes play a vital role in the Canadian economy as seen in the above example. Many people may be familiar with certain buzz words and generalities when it comes to filing annual income tax returns. There are a few things that should be clarified before going into greater detail about personal returns.
What IS a tax return?
A tax return culminates on one long form called a T1. This form may sound familiar because everyone that is employed receives a T4 from their employer breaking down their income for the previous tax year.
General notes on annual tax filing:
- Tax returns are always completed for the previous year (i.e. you submit your 2015 tax return during the first months of 2016 )
- Your tax return takes into consideration all financial matters for a given year, from January 1st to December 31st
- Tax returns must be submitted, or ‘filed’, to the Canada Revenue Agency by April 30th (or the Monday following if April 30th falls on a weekend) IF you have a balance owing* to the Government
- Almost everyone needs to file a tax return, very few people are exempt from filing
*Employers will generally hold back a certain % of your pay each pay period so that you are not left with a hefty tax bill owing when it is time to file your taxes. Based on what you personally do during a given year (i.e. charitable or political donations, investment growths, rental income, etc.) you will generally owe less money through taxes than the amount that was deducted from your employer. This would create a tax ‘refund’, where you will receive money back from the government. There are other situations which can result in taxes owing to the government (i.e. underpaying Canada Pension Plan benefits for a self employed individual).
Filing your personal tax return may seem like something not even worth trying to figure out. However, when you consider that you will be completing a return every year until you die, it is worth the investment of a few hours of research in order to better understand how taxes effect you! The class that benefited me the most through my four years of university was a personal taxation course I took in my final year of study. Understanding the core components of tax filing makes the whole system much easier to understand and navigate when it’s time to completing your personal return. This is especially true considering the legal language in which our tax system was written can seem like a daunting task for anyone to try and comprehend on their own.
It is our goal to help explain the main parts of taxation in Canada in this mini-series. Check back soon for part 2 of the series where we start by explaining (in words we can all understand) what a tax return looks like, what the different sections mean, and how we are effected by them.