The April 30 tax filing deadline is quickly coming into view. Are your clients prepared? As an advisor you might not think it essential to remind clients about the basics, but it’s often appreciated. Not to mention Canadians are often unaware of changes to the tax code. The help you can provide cements relationships by letting clients know you’re always looking out for them.
When to file early
Anyone who expects a refund for overpayment of taxes should obviously consider filing as early as possible. After all, if a refund is expected and filing is delayed, it’s like giving the government an interest-free loan. Equally, the CRA is not as busy early on and will likely to process a refund faster.
I would go so far as to say that any client who is expecting a large refund may well be guilty of poor tax planning. A client with a large refund in successive years should be encouraged to ask their employers to reduce tax withholdings. This is done by filing CRA form T1213-Request to Reduce Tax Deductions at Source.
The CRA does pay individuals interest on overpaid taxes. Interest does not begin to accumulate until May 30 at the earliest or 30 days after the return was filed. The CRA currently pays interest at a rate of 3% on overpayments.
When to wait for the deadline
The other extreme is the expectation that additional taxes will be owed. In this case, the government is giving your client an interest-free loan, which can be a mixed blessing. In this case, it may make sense to prepare the income tax return early and then wait until the deadline to file and pay the outstanding amount. This way, you know the worst and can adjust your finances accordingly. The time can also be used to review the filing to check for any deductions or tax credits that might have been missed, thereby reducing any taxes.
Importantly, the amount owed will still be due April 30, regardless of any filing extensions. An individual who files late will be subject to 5% penalty on the unpaid taxes, plus an additional 1% per month. If your client makes this mistake a second time, the penalty will be doubled.
And one final twist: if an individual ends up owing more than $2,000, the CRA will do a calculation to see if this person should be making quarterly installment payments.
Doing it yourself
When it comes to the actual preparation of a tax return, if the return is complex and the individual is pressed for time and can afford it, by all means they should use an accountant.
Having said that, it’s also true that a good many of your clients would be well served by one of the many tax preparation software packages on the market. Most are user friendly, affordable and ensure mathematical accuracy. They also allow spouses to prepare their returns together, thereby optimizing deductions and credits to ensure the couple’s overall tax bill is minimized.
Bear in mind, if a software package allows e-filing, clients using them should be aware that the CRA may be more inclined to audit e-filings than hard-copy filings.