Show Transcript
The deadline to file your taxes in Canada is quickly approaching. Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, looks at some of the common issues and helps to demystify the language used around tax filings.
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[THEME MUSIC]
As the filing deadline approaches, you may have a lot of tax forms to sift through. It can be a pretty confusing process for many. Joining us now to help demystify some of the language around taxes, Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. Nicole, welcome back to the program.
Great to be here, Greg.
A perfect time to have this conversation as well as it's April now, and we're at the halfway point or more, and we do have that deadline coming for us. Now, where do we want to start in terms of getting comfortable with this terminology? Because people are going to have desk full of papers--
Well-- [CHUCKLES]
--all kind of questions, right?
Well, I'll start with my own confession that it was-- I was well, well into my post-secondary career and law school before I even understood what marginal rates were and tax brackets, and so I have zero expectations that anybody is going to be comfortable with this language unless you've actually been taught and had somebody explain it to you.
So maybe we'll just start with-- very simply, we'll start with the credits and deductions because that's my favorite. That was always one that I was pleased to learn about. So when we think about credits and deductions-- we hear those words, and what do they mean?
Well, personally, I will always take a credit over a deduction [CHUCKLES] because I will be-- if it's the dollar-for-dollar amount, I'd be very pleased because the credit is the amount that comes directly off your tax payable. So after you've already determined what your tax owing is, you apply a credit, and it reduces that amount of tax that you need to pay, whereas a deduction reduces the amount of income upon which you are taxed.
So if we think about this, if we have $100 deduction, I've made $1,000, I'll be taxed on $900, whereas the other way, with a credit, I'll be taxed on the full $1,000, but I get to remove immediately $100 of that tax liability. So credits and deductions-- it's good to have an understanding of what they mean.
That's an important distinction because I would have been one of the people saying, there's some credits and deductions there. Just make sure you take care of it, so important distinction number one.
Here's one I think sometimes people get confused with, when they hear about-- they're trying to figure what their tax rate-- what an average tax rate is, what's an average-- what a marginal tax rate is. What's the important distinction here?
Yeah, so this was-- again, this was a marvel to me when I realized it when I'd hear about people talking about their 50% tax rate, and I didn't realize until much later that that's the marginal rate that they were talking about. So a marginal tax rate is the rate at which your next dollar is going to be taxed, whereas your average tax rate or effective tax rate-- people use that terminology interchangeably-- is the-- when you add it all up, how much-- what your income is, and what your tax liability is, what's the average rate that you're going to pay.
So as we move through the brackets, the first dollars are taxed at this rate, the second dollar is taxed at that rate. Ultimately, you'll get an average of those rates that will apply to your overall income, but marginal rate is only referring to the next dollar that you're going to be taxed on.
OK, a very important distinction on that one. This one is interesting to-- the whole part of filing your taxes is the government wants to know what your income streams were, so maybe you've got interest that you've been accruing but you also have some capital gains. Maybe you got some dividends flowing into your accounts as well. What is the three important distinctions here?
So these are all taxed differently, of course, so interest, income are going to be fully included in tax and taxed at your marginal rate, whereas dividends are subject to a different type of taxation. We have a bump-up and a different calculation that is done, but it's essentially a lower rate than what you'll be paying interest on. Of course, dividends are what you receive from the company on their-- distributing their profits.
And capital gains-- again, we prefer capital gains because that is the amount-- we only need to include 50% of our taxable gains in our income, and we're taxed at that. So essentially, it's a half of what the interest income rate is.
Now, that's interesting to me-- I was having a conversation with a family member who I'll [CHUCKLES] keep nameless, but he was very confused about dividends and capital gains when it came to the investments that he was holding. And he was asking, am I going to be taxed on dividends, or will this be taxed-- will it be taxed in capital gain?
The answer is both. While you hold it, as you're receiving dividends, you will be taxable on those dividends, but when you eventually sell that investment, if there has been a capital gain on it, you will also have a capital gain liability. So that was news to some folks that you can be taxed in two different ways on the same investment.
OK. This next one-- I know that in the electronic age you can receive a lot of the forms that you need and the slips that you need to do your taxes electronically, but I can't read them off the screen. I have to print them all out.
Yes. [CHUCKLES]
Put them across my desk. Then I got a lot of pieces of paper all across my desk, so let's talk tax slip versus tax form versus tax return.
OK. So a tax slip is generally what the third party is going to provide to you, so that's where it has the information that you need in order to complete your return. You may also have slips?
Slips, forms, returns.
Forms. [CHUCKLING]
So forms are sort of augmented-- it's what many of the third parties will have to complete themselves, so they will have to complete a form in order to provide the information that you'll get in your slip, but generally speaking, what we receive are T4 slip. Those are just information that we'll receive.
You may need-- depending if you run a business, you may need to file some forms along with your ultimate return. The return is the overall report to the CRA on your earnings, and your deductions, and your credits, and how you're reporting your taxes.
Here's one-- power of attorney versus executor.
Yeah. [CHUCKLES]
Before this conversation, some said, I'm the power of the attorney, I'm the executor. I said, yes, sure. That's the same thing, I guess.
Well, and that's a great confusion for folks because when you are an attorney for property, it means that you have the authority to act on someone else's behalf, whether or not they have capacity. You've been given the authority to make their decisions for them.
That power ends the moment they die, at which point it is then the executor who then takes over, having the power and the ability to have administrative responsibilities. But it's often used interchangeably, and it's very, very important that if you are the attorney for property and the individual passes away, stop. Do nothing else. You do not have the authority to continue acting for them. It is now the role of the executor.
That may very well be you, but it's important that you understand which hat you're wearing. Is it the attorney hat? Is it the executor hat? Because they're not the same thing, and the responsibilities and liabilities are potentially different.
I'm going to throw something in this conversation here that's not necessarily terminology but something someone I know, who may or may not be me--
[CHUCKLES]
--experienced this year for the first time. I like to file early. I don't know what's wrong with me, but as soon as they open that door, I'm like, boom, let's get in there.
Yes.
And in my haste, perhaps, this year, I forgot a form, and then I saw the form the day after I filed. And I was thinking, oh, no, here we go, but it wasn't that painful. What does someone need to do if they realize that, oh, wait a minute, that's material, and I forgot to put it in there?
Well, you have firsthand experience now, so. [CHUCKLES] Essentially, you're filing an amendment. You are just asking them to revise your form, and you're amending your return, in which case you will be then taxed on that amount.
And it's really important-- I'm glad you did that-- because I one time missed a slip. I'm sorry. Pardon me. Yeah, I missed a slip and didn't report it, and it came back that I had income I hadn't reported. And they did my notice of assessment and changed it. That's fine.
The next year, I did it again, Greg. I did the same thing. I thought that had been resolved the year before. It hadn't. And as a result, I had a much more expensive outcome than I otherwise would have because if you are a repeat offender for having not declared your whole income, then the penalties are substantially higher than if you just make a mistake like you did and just rectify it right away. That's definitely the best approach to take.
I did it. [CHUCKLING]
Anything else, maybe, that we need to think in terms of-- as people-- because this has been very helpful information clearing the terminology. People are still going have stacks of paper on their desk. What, overall, should be thinking about?
Well, try to be as organized as you possibly can. We want to-- if you have, through this experience of filing for this year, found it more difficult than it needed to be-- I know there's a temptation to just put everything away. You're done now, and you want to move on.
But perhaps if you can do a little bit of an after-action review and see what you could have done differently going into the year that would have made this process easier for you-- so if your receipts were all over the place, now is a great time to develop a strategy for how you're going to retain your records, what you're going to be doing with them, maybe make a note of the timing.
So if they-- if we have extra information that we wouldn't have otherwise had or that came after a little bit later, maybe make a note of the dates when that's come out so that you can anticipate that for next year.
And I would say-- the conversation about-- really, we're talking about financial literacy, and some of these topics can be difficult or confusing and the more comfortable you are saying, I don't know something, and reaching out to a professional who can help you navigate some of these questions-- or dive into that research and get comfortable with that terminology.
What's the difference between personal use items? And how are you taxed on that versus a capital property? And how are you taxed on that? This is terminology that is in-- that those of us in the business talk about very naturally, and there tends to be an assumption that everybody is going to be comfortable with it.
But the vast majority of people are not comfortable with it. I just want to say, there's no reason why you should be. It's a whole other language. And it's essentially a code, and it is, the tax code. So yeah, I would say that during this experience this year, try to figure out where the friction points were, and do as much as you can to put yourself in a better position for next year. [THEME MUSIC]
As the filing deadline approaches, you may have a lot of tax forms to sift through. It can be a pretty confusing process for many. Joining us now to help demystify some of the language around taxes, Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. Nicole, welcome back to the program.
Great to be here, Greg.
A perfect time to have this conversation as well as it's April now, and we're at the halfway point or more, and we do have that deadline coming for us. Now, where do we want to start in terms of getting comfortable with this terminology? Because people are going to have desk full of papers--
Well-- [CHUCKLES]
--all kind of questions, right?
Well, I'll start with my own confession that it was-- I was well, well into my post-secondary career and law school before I even understood what marginal rates were and tax brackets, and so I have zero expectations that anybody is going to be comfortable with this language unless you've actually been taught and had somebody explain it to you.
So maybe we'll just start with-- very simply, we'll start with the credits and deductions because that's my favorite. That was always one that I was pleased to learn about. So when we think about credits and deductions-- we hear those words, and what do they mean?
Well, personally, I will always take a credit over a deduction [CHUCKLES] because I will be-- if it's the dollar-for-dollar amount, I'd be very pleased because the credit is the amount that comes directly off your tax payable. So after you've already determined what your tax owing is, you apply a credit, and it reduces that amount of tax that you need to pay, whereas a deduction reduces the amount of income upon which you are taxed.
So if we think about this, if we have $100 deduction, I've made $1,000, I'll be taxed on $900, whereas the other way, with a credit, I'll be taxed on the full $1,000, but I get to remove immediately $100 of that tax liability. So credits and deductions-- it's good to have an understanding of what they mean.
That's an important distinction because I would have been one of the people saying, there's some credits and deductions there. Just make sure you take care of it, so important distinction number one.
Here's one I think sometimes people get confused with, when they hear about-- they're trying to figure what their tax rate-- what an average tax rate is, what's an average-- what a marginal tax rate is. What's the important distinction here?
Yeah, so this was-- again, this was a marvel to me when I realized it when I'd hear about people talking about their 50% tax rate, and I didn't realize until much later that that's the marginal rate that they were talking about. So a marginal tax rate is the rate at which your next dollar is going to be taxed, whereas your average tax rate or effective tax rate-- people use that terminology interchangeably-- is the-- when you add it all up, how much-- what your income is, and what your tax liability is, what's the average rate that you're going to pay.
So as we move through the brackets, the first dollars are taxed at this rate, the second dollar is taxed at that rate. Ultimately, you'll get an average of those rates that will apply to your overall income, but marginal rate is only referring to the next dollar that you're going to be taxed on.
OK, a very important distinction on that one. This one is interesting to-- the whole part of filing your taxes is the government wants to know what your income streams were, so maybe you've got interest that you've been accruing but you also have some capital gains. Maybe you got some dividends flowing into your accounts as well. What is the three important distinctions here?
So these are all taxed differently, of course, so interest, income are going to be fully included in tax and taxed at your marginal rate, whereas dividends are subject to a different type of taxation. We have a bump-up and a different calculation that is done, but it's essentially a lower rate than what you'll be paying interest on. Of course, dividends are what you receive from the company on their-- distributing their profits.
And capital gains-- again, we prefer capital gains because that is the amount-- we only need to include 50% of our taxable gains in our income, and we're taxed at that. So essentially, it's a half of what the interest income rate is.
Now, that's interesting to me-- I was having a conversation with a family member who I'll [CHUCKLES] keep nameless, but he was very confused about dividends and capital gains when it came to the investments that he was holding. And he was asking, am I going to be taxed on dividends, or will this be taxed-- will it be taxed in capital gain?
The answer is both. While you hold it, as you're receiving dividends, you will be taxable on those dividends, but when you eventually sell that investment, if there has been a capital gain on it, you will also have a capital gain liability. So that was news to some folks that you can be taxed in two different ways on the same investment.
OK. This next one-- I know that in the electronic age you can receive a lot of the forms that you need and the slips that you need to do your taxes electronically, but I can't read them off the screen. I have to print them all out.
Yes. [CHUCKLES]
Put them across my desk. Then I got a lot of pieces of paper all across my desk, so let's talk tax slip versus tax form versus tax return.
OK. So a tax slip is generally what the third party is going to provide to you, so that's where it has the information that you need in order to complete your return. You may also have slips?
Slips, forms, returns.
Forms. [CHUCKLING]
So forms are sort of augmented-- it's what many of the third parties will have to complete themselves, so they will have to complete a form in order to provide the information that you'll get in your slip, but generally speaking, what we receive are T4 slip. Those are just information that we'll receive.
You may need-- depending if you run a business, you may need to file some forms along with your ultimate return. The return is the overall report to the CRA on your earnings, and your deductions, and your credits, and how you're reporting your taxes.
Here's one-- power of attorney versus executor.
Yeah. [CHUCKLES]
Before this conversation, some said, I'm the power of the attorney, I'm the executor. I said, yes, sure. That's the same thing, I guess.
Well, and that's a great confusion for folks because when you are an attorney for property, it means that you have the authority to act on someone else's behalf, whether or not they have capacity. You've been given the authority to make their decisions for them.
That power ends the moment they die, at which point it is then the executor who then takes over, having the power and the ability to have administrative responsibilities. But it's often used interchangeably, and it's very, very important that if you are the attorney for property and the individual passes away, stop. Do nothing else. You do not have the authority to continue acting for them. It is now the role of the executor.
That may very well be you, but it's important that you understand which hat you're wearing. Is it the attorney hat? Is it the executor hat? Because they're not the same thing, and the responsibilities and liabilities are potentially different.
I'm going to throw something in this conversation here that's not necessarily terminology but something someone I know, who may or may not be me--
[CHUCKLES]
--experienced this year for the first time. I like to file early. I don't know what's wrong with me, but as soon as they open that door, I'm like, boom, let's get in there.
Yes.
And in my haste, perhaps, this year, I forgot a form, and then I saw the form the day after I filed. And I was thinking, oh, no, here we go, but it wasn't that painful. What does someone need to do if they realize that, oh, wait a minute, that's material, and I forgot to put it in there?
Well, you have firsthand experience now, so. [CHUCKLES] Essentially, you're filing an amendment. You are just asking them to revise your form, and you're amending your return, in which case you will be then taxed on that amount.
And it's really important-- I'm glad you did that-- because I one time missed a slip. I'm sorry. Pardon me. Yeah, I missed a slip and didn't report it, and it came back that I had income I hadn't reported. And they did my notice of assessment and changed it. That's fine.
The next year, I did it again, Greg. I did the same thing. I thought that had been resolved the year before. It hadn't. And as a result, I had a much more expensive outcome than I otherwise would have because if you are a repeat offender for having not declared your whole income, then the penalties are substantially higher than if you just make a mistake like you did and just rectify it right away. That's definitely the best approach to take.
I did it. [CHUCKLING]
Anything else, maybe, that we need to think in terms of-- as people-- because this has been very helpful information clearing the terminology. People are still going have stacks of paper on their desk. What, overall, should be thinking about?
Well, try to be as organized as you possibly can. We want to-- if you have, through this experience of filing for this year, found it more difficult than it needed to be-- I know there's a temptation to just put everything away. You're done now, and you want to move on.
But perhaps if you can do a little bit of an after-action review and see what you could have done differently going into the year that would have made this process easier for you-- so if your receipts were all over the place, now is a great time to develop a strategy for how you're going to retain your records, what you're going to be doing with them, maybe make a note of the timing.
So if they-- if we have extra information that we wouldn't have otherwise had or that came after a little bit later, maybe make a note of the dates when that's come out so that you can anticipate that for next year.
And I would say-- the conversation about-- really, we're talking about financial literacy, and some of these topics can be difficult or confusing and the more comfortable you are saying, I don't know something, and reaching out to a professional who can help you navigate some of these questions-- or dive into that research and get comfortable with that terminology.
What's the difference between personal use items? And how are you taxed on that versus a capital property? And how are you taxed on that? This is terminology that is in-- that those of us in the business talk about very naturally, and there tends to be an assumption that everybody is going to be comfortable with it.
But the vast majority of people are not comfortable with it. I just want to say, there's no reason why you should be. It's a whole other language. And it's essentially a code, and it is, the tax code. So yeah, I would say that during this experience this year, try to figure out where the friction points were, and do as much as you can to put yourself in a better position for next year. [THEME MUSIC]
