What paperwork you need, when you need it, and how to calculate your refunds
Of all the milestones in your life, filing your first income tax return probably isn't the one you look forward to most.
It's no wonder. Byzantine rules, deadlines and the possibility of a big hit to your finances can add up to a very stressful experience. But since it can't legally be avoided, being prepared for the experience and understanding what you're getting into can make your first time with the Canada Revenue Agency less intimidating.
The first piece of advice is to be organized and have your documents in order. Excellent advice, of course. But if you've never done this before, what documents have to be in order?
You'll need your personal information -- social insurance number (SIN), address and phone number. There may be other documentation that applies, for example, for claiming the Northern Resident Deduction, rent expenses, and automobile expense logbooks. If you are not sure what to keep, refer to a tax checklist to help make sure you've covered all the documentation bases.
For most filers, the T4 slip is the foundation of the tax return. It reports your employment income, tax withheld at source, taxable benefits, etc. If you had more than one employer during the calendar year, you should have a T4 from each. Employers are required to mail this to you or present it in person or with your pay stub if you still work there on February 28. Make sure all of your employers over the course of the year have your current address. Missing a T4 slip means you are not reporting all your income, which can lead to penalties and assessments.
If you've received benefits like employment insurance (EI) from the federal government, you'll also receive T4E for inclusion in your return. You don't need to wait for the mailman since the forms are available online if you sign up at Service Canada. If you have interest income from your bank account, dividends or mutual funds, they'll be documented on a T3 or T5 slip from your financial institution or mutual fund company.
If you're a student, and you had no income, you might look at your T2202A slip indicating your tuition amount and the number of months you can claim the education and textbook amounts and have visions of big refunds. Unfortunately, that's not the case.
First, in order to get a tax refund, you have to have paid income tax during the year. Remember, a tax refund is money you overpaid the government during the year. Here's where it's important to understand the difference between a tax credit and a deduction.
Most tax credits are non-refundable, so they can't create a refund on their own. They are applied against your tax owing at a rate of 15 per cent. So if, for example, you spent $1,200 this year on transit passes, your tax owed is reduced by $180. A full list of available tax credits is on Schedule 1 of your tax return.
On the other hand, deductions are applied directly against your income. Moving expenses, child care expenses and registered retirement savings plan (RRSP) contributions are examples of deductions. Deductions not only reduce your taxable income, they can change your tax bracket. You pay 15 per cent tax on the first $43,953 you earn; you pay 22 per cent on income from $43,954 to $87,907. So a deduction that puts your income below that threshold changes your effective tax rate.
Unfortunately, if you're filing for the first time, you're not eligible to make RRSP contributions. Your RRSP contribution room is based on your income from the previous year. Once you file, you will start building your room.
So those tuition fees don't amount to a tax return if you had no income. Why bother filing? You can carry forward the credits to use in future years, but you have to record them in the year you received the slip. And other benefits are calculated based on your annual tax return filing, including the GST/HST quarterly benefit.
Until last year, first-time filers did not have the option of using the CRA's NETFILE system to submit their taxes online. That's been rectified, and it's worth taking advantage of; your return will be processed faster, and if you set up direct deposit with the CRA, you could have your refund in as little as eight days.
When you file online, you don't have to supply copies of your documentation. But that doesn't mean you don't have to keep them handy and organized. If the CRA reviews your return, or you want to dispute your assessment, you'll need them. They have to be kept for seven years.
This is the beginning of a lifelong relationship with the CRA. Get off on the right foot by filing on time, and it will be easier to maintain good relations down the line. Building the habit now will make life easier when your taxes become more complicated.
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