Don’t do so, say the experts. Majority of Americans are likely to get a whopping amount in their account in terms of a tax refund. It could be a few thousand dollars. And it could send you jumping in the air.

The fact is that rather than making a wise use of such tax refund amount, most of people spend such money on things like buying new clothes, going on a vacation, grabbing electronic gadgets or just on everyday things. That’s not all. Some are keen to buy a new car by using the amount of tax refund.

This needs to be avoided, at all costs. The onus is how to use this money judiciously and in the best possible manner.

Don’t spend your tax refund on following—

• Electronics—Don’t waste your tax refund amount by buying a new computer, an iPad, a new TV, a gaming system or anything that you fancy a lot. There is no logic in buying above or related gadgets just because you have just got a big amount in your bank account through the tax refund.
• New car—Want to use your tax refund for buying a new car (of your dreams)? No, it’s not the right move. You may buy a new car, but not with your tax refund. Rather, it should be from the money saved by you.
• Gambling—Make sure not to use your tax refund money for gambling. Just try to consider that if you lose, you will lose a big amount of cash that could have been used for several other important things.
• Party—Wasting away your money (tax refund) on foolishly partying around is a big no-no.

How should you spend your tax refund?—Smart ways–

• Pay down mortgage—Paying down your mortgage by using your tax refund is a good move.
• Pay down high-interest debt—Just pay down any debt with high interest especially your credit cards. It’s one of the most effective means of using your tax refund.
• Save for the rainy day—Making savings for emergency is yet another smart move for spending your tax refund. Create an emergency fund to pay off in case of any unforeseen need.
• Retirement saving—Set aside some amount of tax refund to be used after retirement. It’s a good investment to safeguard your retirement period.

Investing in Registered Education Savings Plan

With the deadline of April 30, many of the Canadians are now in a “relaxing mode”, at least on the front of taxes and filing returns. Most of the responsible families have already filed their returns, some have started looking forward to a “refund”, and some have started planning further on “finances”.

In fact, there are people who can’t hold their excitement back thinking about the refund they are likely to receive from the “Tax Department”.

The Tax Refund and its fate

Many people must be planning to spend a vacation with the money they would be getting as tax refund; there is yet another who wants to make it a part of buying a “new car”, which probably must have been waiting for some time now. You may also find others who would like to use the refund in paying the mortgage whereas there would be some hot don’t mind is using the money for making a “mutual fund investment”. The decision certainly is of the person who gets a refund though, there the same money can use for securing your child’s education too. After all, CRA has made an announcement that the average refund is going to be somewhere around $1700. And this is certainly not a small amount of money.

The best possible utilization

Many of the experts suggest that the best possible way to use your refund is to invest it into “registered Education Savings Plan (RESP).” This will secure the future of your child and will help you to grow your money better too.

A little about Registered Education Savings Plan

This scheme was introduced by Canadian Scholarship trust Foundation almost five decades back. Presently there are almost 300,000 families relying on this plan for securing their child’s future education. The aim of this program is to encourage post-secondary education and higher education amongst the youth which sometimes they are not able to pursue due to lack of funds. The parents can possibly gift it to their children without allowing it to become a burden on their financial planning, because, refund may be regarded as an unexpected gift from the government.

The working of RESP

If the average refund is saved into this kind of a plan right when a child is born, by the time he or she turns 18, one can expect this amount of money to grow up to $53,000. And this amount can be readily available for the child when he or she intends to take up pots secondary education at the age of 18 or above.

This clearly indicates that even if the cost of education gets expensive with time and inflation is taken into account, the growth is certainly a good one, and for this one is not having to take out any thing from the plannings he has.

Hence this time when you get a refund think of Registered Education Savings Plan and secure the future of your child by gifting him an assured higher education as per his desire.

Cheating on Taxes

Those who have been thinking of escaping taxes and paying less to the Government should be aware now. There is a strong message from the Government that they won’t be spared.

The new regulation

The Government would now be able to reach the accounts a Canadian citizen holds with any other country too. And this is a new strategy adopted to catch upon the tax cheats.

Finance Minister, Jim Flaherty, made this announcement that the information about any individual can be swapped to retrieve the details of bank account.

The new regulation is completely in coherence with the law passed in 2009, which allows bureau gather information from any of the foreign counterparts.

Carlo Carg, Finance Undersecretary informed that, “tax evaders now have nowhere to hide.”

The precursor to the regulation

Rey Mari, Internal revenue bureau spokesperson says, ”The Government would take every step to catch the Tax evaders. ”

The statistical analysis

Bureau of International revenue suggests that only 5 million people file their returns and hence pay their taxes. Ultimately this leads to deficit in revenue generation and hence restricts the Government from delivering even the basics of the services.

The impact of the Regulation

Carag further informs that with the help of this regulation Organization for Economic Cooperation and development to categorize Philippines as a “white list” of countries. This is because it has implemented the tax standards.

Philippines have the authority now to request any country to get the details of bank account of any individual.

Criminal charges are being framed against high profile personalities and even companies who are suspected of evading taxes, especially on “import duty”.

The catch by the Canadian Government

CRA has caught upon 1,700 names from Canada who hold account in HSBC. And this is done with the help of an informant who is supposed to be a former IT employee of HSBC private Bank in Geneva. At the same time the Revenue Minister expresses concern about the privacy rights of the people paying taxes. He is of the opinion that the rights of the taxpayers should be reserved even if there is a bilateral confidential deal between Canada and France.

In spite of making such a big hue and cry about the matter, there are hardly 7 cases a year which lead to conviction in court.

The way out for the tax payers

The taxpayers holding account in HSBC Bank can make a “voluntary disclosure” about the income which they revealed before. They have the option of paying the pending taxes along with interest and can avoid facing any kind of penalty or charges.

Cheating on taxes could be a major case one can be convicted for, when caught with enough evidence. There is always a better way to handle the situation by owning up and clearing the dues. Government has to get strict on this issue because it needs revenue to provide basic facilities to the people.

Handling a Tax Audit

When you receive the intimation from Canada revenue Agency about being audited, you tend to lose your cool and get nervous about the whole affair. No matter, how proper your paper documents are or how good and honest you have been with your returns, you tend to forget a lot many things.

The dark shades

• CRA will catch you on hidden information: there could be certain information which you might not have shared while filing your returns. So, never live in the issuing that they will not come to know about the hidden facts. Get prepared with an answer on “Why you had hidden them?”
• Donations will be examined: get prepared to give an answer to all the donations you have made in a charitable trust or any such organisation. They will certainly verify with them too, if you have made any such donations. So, eye washing in this area is a rare possibility.
• Filed Returns with no mistake yet there could be questions: In spite of submitting all the required documents and filing your returns to the best of your knowledge, you may be thrown questions and would be expected logical answers. If you don’t, satisfy the logic then you may get into a deep soup.
• Taxes are constitutional: You must accept that federal as well provincial government has every right to collect taxes from the citizens because this is the largest source of revenue generation for them. In turn you are getting quite a few facilities too.
• Can’t pay taxes then don’t file returns: Even if you are not is a position to pay taxes, you must file your returns so that the government is aware of your status. Otherwise, later if you claim to enjoy a facility given by the Government you may not be eligible to receive the same.

The Light shades

• File Closures: The officials coming on behalf of CRA might not be that interested in collecting revenue for the government, rather their primary aim is to close the “improper files” as soon as they can, because they have a galore of them to handle. In fact, this could work in your favour too.
• Officials have a vast knowledge of tax laws: they might not have a vast knowledge on “tax laws” however; you should get prepared for them holding a sound knowledge in this area. This is another lighter shade for you because it may save you from a few of the hassles.

The last minute preparation

Tax Audit is never an easy and “welcoming experience” for the one who undergoes it. However, there are some who are better prepared in terms of paper, emotions and otherwise too. Once you receive a date the best revise your documents on income and expenditure or deductions and look into all possible details submitted by you. This would be quite helpful in making you answer the auditors. And will also help you to speak flawlessly.

Foreclosures

Many of the borrowers wonder about the fate of foreclosures and debt cancellation while filing their returns. There could be yet other queries on other instances when you need to understand the inclusion of or exclusion of certain aspects of mortgage restructuring or any other related issue. The worry is if there the same would be included or excluded from the tax calculations or not.

To get a brief idea about all this you can read the following lines:

What happens when your debt gets cancelled?

When your debt gets cancelled for some reason or the other, then you must remember that this amount has to be included in your income tax.
And this is early because, at the time of borrowing the loan, you were supposed to pay the same back. Now, you are free of this obligation hence the lender would be reporting the same to IRS for his benefit. This means, you also need to include it your tax details.

Even if you have paid a part of the loan and a part is cancelled then also, you will be liable to pay a tax on the remaining amount because it becomes a taxable income to you.

Some exceptional cases are:

• Debts paid to clear the bankruptcy will not be taxed.
• In case of “insolvency” you will not be liable to paying taxes.

There could be few more cases when debt cancellation would not attract any tax.

Impact of Foreclosure on taxes

If you are heard of making a gain out of disposing a property then you will have to pay a tax and the same would be treated under sales for tax purposes.

Calculation of income from foreclosures

• Firstly, you need to calculate the debt left after foreclosure. And for this it is important to enter the current and fair market value of the property. In fact, these two are the important information for calculating the tax in the long run.
• In case you have been the owner of the house and have been using the same for principally residing there, you have the privilege of deducting $25,000 from the income. A married couple who jointly file their returns can make exclusion up to %50,000 too.
• If you incurred any loss then too you will not be able to enjoy any deductions.

In case of any difficulty

If you don’t agree to the tax calculations or debt, or foreclosure value, you can always check the same with your lender and get it clarified. Otherwise, there are helpline numbers available on IRS site which are open to lodge your doubts and give you a clarification if needed.

Debt Cancellation and Foreclosures are important financial issues which may need more understanding and thorough research before you finalize the same. You may contact an expert on this, or may even read through the terms and conditions on the IRS site. But, don’t jump to a conclusion before you are sure about the rules and regulations.

Delay in filing the returns

Every year, there are quite a large number of Canadians, who delay filing their returns. And they have their own thought about the same. Some are reluctant, some are too occupied with other things and yet another set of people think that as it is they are going to get a refund so there is point filing the returns on time.

The losses you may incur for filing the returns late

There could be following losses for filing your returns late:

• Interest Free loan: if you are filing your returns late, then you are surely giving interest free loan to Canadian Government.
• Cut in Social benefits: When you don’t file your returns on time, then you may be losing upon a lot many benefits like Child Tax benefit, Guaranteed Income Supplement. And these can be quite an important component for those who have limited earnings.
• A few important elections: you will be eligible to elect “split pension income” only when the returns of you and your spouse are filled on time.
• Foreign holding: Many people hold foreign securities or foreign property and these can attract certain amount of penalties if the returns are not made on time by disclosing the details.
• Cut in the refund: Those who expect a refund must ensure that they file their returns on time; otherwise, if not filed within three years, the refund will be deducted to a large extent. Moreover, delay in filing returns in one area could hamper the refunds in the other too.

The penalties you may attract for late filing

• You must be prepared to pay a penalty of 5% on the amount you are due to pay. In addition to this you must be ready to pay an additional 1% for the delay of every month you make, and this will continue for 12 months.
• If you have been penalized for late filing even once in the last three years and again you are repeating the same error then this time get prepared to pay more of penalty. Now, you will be liable to pay 10% on the balance amount as penalty for the delay in current year. This will attract an additional 2% penalty every month to a maximum of 20 months.

Some relief for the tax payers

Canadian Government has the provision of providing benefit of doubt to the tax payers. And for this, a tax payer can disclose any information which he had hidden either intentionally or unintentionally. This covers any information on income tax and goods services tax/HST and those who did not reveal certain information like unreported income from business, employment or capital gains can make it an official affair.

Expert Advice is to file the returns on time so that one does not attract any penalty or undergo any kind of harassment from the Tax Department. One has to pay taxes either sooner or later, so it makes complete sense to do so without any delay.

Tax Myths

The way people get geared up for paying taxes right from the beginning of the year, similarly, you may find many of them living into myths associated with taxes.

Some of the prevalent tax myths could be as following

Tax free income earned during maternity leave: Many of the “new mothers” live under the illusion that the earnings they are making during “maternity” leave would not be taxed by Government. But, they don’t realize that they are living under a myth and they have to pay taxes for this income too. And this is because this income is observed as “Employment Insurance benefits” and hence Government will charge a tax on it.

No Tax on tips: This is generally earned when one is working in a “hospitality industry”. People live happily thinking that the “tips” are not considered to be a part foot heir income. But, if you look at it from Government’s point of view then you will see that such tips make up for almost 400% of an employee’s income. And the Tax Department can’t really afford to leave it without charging a tax. So, those who are into the job of serving must maintain a record and get geared up for a tax.

No tax on RRSP contributions if deduction not used: Even if you are not using the deductions on the RRSP contributions you are making then also you will have to get prepared to pay the taxes and it will be reflected in your tax returns too.

Child Care expense: It is a myth to think that the parent with lower income should make the claim first and then the one with higher income. But, the fact is that either of the parents can make the claim.

Students can directly claim a refund: they can make such claims only when they over okay the income tax. But, students are hardly known to have taxable income so tuition fee cannot be claimed for a refund. However, Government has given the facility of transferring the amount up to $5,000 to the parents or grandparents from claiming refunds.

Deductions on Tax Mileage: One may think of getting a deduction directly on “business mileage “but, even a self-employed person needs to maintain a log on the same to get a little benefit.

Working outside the country would not invite any tax: One needs to report the date of leaving or emigrating from Canada and also the date when you are returning back, only then the decision will be taken if you have to pay taxes or not. In any case a return has to be filed to report this information.

Summary

Tax Myths may give you happiness for a while but, the matter of fact is that one must file returns and then leave it to the Government to take a decision on this. Otherwise, you may land up paying a penalty for the myth which surrounded you.

Tax Evasion

Canada has a large percentage of people who are quite prompt and honest about paying their taxes. And surprisingly their honesty is nothing but exploited by those who always find tricks to reduce their tax amounts.

The notification

There are people who get their taxes calculated by an expert consultant in spite of them being able to do the same. They don’t want to pay any fewer amounts and hence are ready with their check books to sign a “leaf” of the amount indicated by the Consultant. They always land up paying the taxes may be on the first day itself.

Unfortunately, in spite of being so prompt, they cannot be assured of no receiving a letter from Canada revenue Agency(CRA) that a certain amount is due to be paid by them. Someone who has been so prompt and perfect about paying taxes would certainly get irritated to get such a notification.

The operational inefficiencies

• There are cases when CRA loses documents submitted by the tax payers and in turn letters are issued to them to submit the same set of papers all over again. For someone who thought he was over with the process of “returns” it nothing but a kind of harassment to collect the papers all over again, because once you are done with “returns”, you generally, tend to concentrate up the New Year’s papers.
• The fallacy in the tax returns system is well reflected by the date which shows, about $10 million is to be remitted by the Federal Government and about &80 million by the Provincial Government.
• Across the various provinces the tax gap is quite large. And this again reflected by the information which says, Ottawa collects more than $110 billion as income tax annually which is much larger than the amount collected by many other provinces in Canada.
• The Government has the provision of awarding any informant who reports a matter of “tax cheat” to the concerned department.

The efforts made by the Government on this front

Revenue Minister informs that an agency of 40,000 people have been created to check upon the “tax cheats” so that the gaps across various provinces can be bridged up and the government can collect more and more revenue through this source.

There is also an announcement from Finance Minister Jim Flaherty that any informant about a hidden treasure would receive 15% of the recovered taxes. At the same time the reward itself would be taxable.

The larger picture

Government needs to look into the larger picture because those who are particular and sincere about paying taxes would morally feel down ad may consider the option of plying a “cheat”. And this won’t be surprising because such people are getting aware of the “insignificant” efforts made by the Government to catch upon the shirkers

Tax Evasion has to be dealt with a wider perspective otherwise, the Government suffers from the fear of losing those who have been paying their taxes on time and in an accurate amount.

Some of the advice you may cash in are listed here below:

 If you can start with sufficient cash:

 Jason Papier, President, Fluent Wealth Partners and an expert in stock option in the Silicon Valley suggests that an entrepreneur must keep a year’s worth of personal expenses as stand by in a liquid account to respond to an emergency situation.

Make sure that you have control over your cost of living:

The founder and chief marketing officer of Confirmation.com, Brian Fox, managing theBrentwood, Tenn based online auditing company, is a good example in this matter. He had the teething trouble of raising his company. At the beginning when he encountered various cash crunches, he had surrendered TV viewing need, stopped eating out and minimized his mobile phone expenses by switching over to an economic plan. Jason Papier furthers to say that if needed, you may have to even cut down your food bill by satisfying yourself with the bare food needs.

Support of your friend and family:

It will be better if your friend and family stand by you. The most important part here is to make your own circle understand your venture / your confidence in running the venture / the venture’s strength and so on. Once you can convince your own circle, you can pass through different obstacles coming in the way.

But here is a caution from Fox. He says do not go for a partnership business. Better you take loan with proper documentations, so that your sunny days in future should not be converted as murkier by your so-far friends. Many times it happens. Another expert, Dan Sudit advises that when you are taking the monetary help from your own circle, be transparent to each other about the expectations they may have from you, nothing should be left unspoken / unexplained / undocumented.

Do not off-load too many shares in haste:

In case you want to have the shares of many others in your enterprise, better keep the largest chunk with you. Your friends, family or employees must not surmount you, and you become underdog.

Never touch your retirement savings:

Many are there to have fallen down after usurping their home equity lines, credit card debt and such other giant sources.

Divorce and Tax implications

Government provides many benefits to the couples filing their Income Tax jointly. However, when you make the decision of getting separated or divorced from your spouse, there could be many implications and it may cost you a lot in terms of taxes.

Following are some of the ways which can help you to save a little :

• Dividing the Property: When you split the assets between the two of you, the tax on the same would rise. So, you have to make careful considerations to ensure that you don’t pay through your nose while filing returns. If you own a home jointly, then the wise step would be to show through papers that the wife owns the house rather than the husband because she would be enjoying the “Principal Residence Exemption”.

In case you own more than one property then you must, distribute them equally to both of you so that each one of you can claim “Principal Residence Exemption” for the two properties.

• Distributing the RRSP: If both you have been making contributions to an RRSP account then the wise step is to leave it with the husband because the whole of the amount at maturity would be included in the husband’s account. Also, according to the Income Tax Rule, on separation one spouse is allowed to transfer the amount to the other, completely. Those who are not willing to do so land up cashing the RRSP and paying a huge tax amount.
• Child Tax benefit: On getting divorced, one must keep Canada Revenue Agency informed about the same. This becomes mandatory because, after getting separated or divorced, the income of spouse is subtracted from the equation. This gives you an edge because only your income is taken into consideration and you may enjoy a larger tax benefit on this aspect.

If you have more than one child, then both you and your ex-spouse can claim for the tax benefits for one child each, if both of   you are sharing equal responsibility.

• Legal fee is exempted: To deal with your case, you must have hired a lawyer. You must collect papers to show the cost you had to bear for the same. This will get you deductions in your tax when you file personal tax return.
• You are not responsible for your spouse’s tax: If your spouse fails to pay the taxes on time, then you are not responsible for the same. Never sign a paper which would mean or reflect any kind of joint responsibility on tax front, unless mandatory and consulted with a tax expert.
• Marital Status: To enjoy any and many of the tax benefits you must report your marital status to the concerned department. If you are married on the last day of financial year then you will be considered to be so for the whole year, and if you are single on the last day then your returns will be treated accordingly for the whole year.