05/29/2015 09:34 EDT | Updated 05/29/2016 05:59 EDT

Preparing Now May Avoid a Tax Bill Next April

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canadian taxes

Most Canadians were expecting a refund this year but more than three million taxpayers owed money. A tax bill should not be a surprise.

Once April 30 passes, most people forget about their taxes for another year. It is tempting to just file it away but you should try to introduce a little tax planning into your financial life so next year's return holds no surprises. Especially if it involves a tax bill.

If you are a regular employee, your employer should withhold enough from your paycheque to cover your income tax obligation. But if your situation changes, you should let your payroll department know so they can adjust your tax withholdings. Though it is nice to get a tax refund, remember it is money you have overpaid the government during the year.

So how do you end up owing taxes? There are many reasons but here are some common situations that might result in a tax bill.

If you have two jobs, you may find yourself owing at the end of the year. When your employer calculates your tax withholding, they give you the basic personal exemption amount which is $11,327 for 2015. This is the amount of income you can earn before paying federal income tax. The problem is you only claim the personal exemption once on your tax return. If two employers are using it as part of their calculations you could end up owing a significant amount. If you are working two or more jobs, you should either save some additional funds to cover your tax bill or inform your second or third employer about your situation and ask them to make adjustments to your tax withholdings.

Working outside of the province can also cause some tax headaches. The Canada Revenue Agency expects you to file a tax return based on your province of residence. They determine your residency based on your ties to a particular province. For example, if you own a house in New Brunswick where your family lives while you work in Alberta for most of the year, the CRA still considers you a resident of New Brunswick since that is where you have your primary residential ties. Other factors like your provincial health card or driver's license can also be factors in determining your province of residence.

If you are working out of province, you should pay attention to your tax rates. In the above example, Alberta tax rates are lower than New Brunswick. An Alberta-based employer will deduct income tax based on the Alberta tax rate so you may find you owe taxes when you file your New Brunswick return next year. Again, you can either speak to your employer about increasing your tax withholding or you can set some money aside to cover any tax liability next year.

Maternity leave and other forms of Employment Insurance (EI) are taxable income so they can also result in a tax bill. Service Canada withholds income tax from your EI payments as if it was the only income you received during the year. Depending on when your payments started and how much money you earned during the year, you may find you owe tax at filing time.

If you decided to become self-employed this year, congratulations on your new venture but be prepared for your tax return. Since you are earning income and having no tax withheld, if you earn a profit in 2015, you can expect to be writing a cheque to the Receiver General next year. Usually, you can only get a tax refund if you actually paid tax during the year. So save at least 30 to 40 per cent of your income to cover your tax obligations.

Capital gains can also lead to a tax bill but if you are expecting one, you may be able to take steps to help reduce it. Fortunately, capital gains are taxed at a lower rate than income. If you sold an investment property or a high performing stock, you will need to report your capital gain in 2015. Make sure you have record of all your expenses to help reduce your gain. Only capital losses can be claimed against a gains so you could also explore selling a losing stock to help offset the gain of another. But make sure you understand all the implications before attempting a tax-loss selling strategy.

Waiting until April 2016 to try and reduce your 2015 tax bill is too late. Most of what impacts your 2015 happens during the calendar year so pay enough attention to your taxes before the end of the year so you are prepared when you file. Having a tax bill is not always a bad thing - as long as you are prepared for it.


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