Monday, January 14, 2013

Preparing Your Canadian T1- Individual Tax Return

Canadian taxpayers or non-taxpayers who wish to file their own T1- Individual income tax returns should have all the necessary tax information to prepare their T1s in a more efficient and effective manner. This information might include: T-slips, pay stubs, statement of earnings, receipts, related tax files and information required to complete these T1-General Income tax & Benefit Returns. Individual Tax Return for recent calendar year period ended has to be filed on or before April 30th of the following year. For all unfiled tax returns for all prior years can be filed at any time. This application process will include the type of filing to be used.

There are few ways to file your TI- General Income Tax & Benefit Return. You can either hire an accountant, a tax preparer, or you can prepare it yourself. If you decide to file it yourself, you can file your individual tax return through online using tax software for EFILE, or NETFILE, or filing by phone through TELEFILE, or file in paper form and send/drop it to any closed by Canada Revenue Agency (CRA) office.

This year, CRA has made it mandatory to file electronically for all tax preparers who are filing for more than ten (10) T1s, with the exceptions of prior tax years (before 2012), and other exceptions. Therefore, when there are only a few of T1-General Income Tax and Benefit Return forms to prepare, you can either do them in paper form or use tax software and send completed income tax returns by mail or drop it at CRA office in person.

Preparing paper tax returns can be time-consuming, and likely computational mistakes can occur. However, there are ways to eliminate these mistakes. I have been preparing income tax returns in the last two decades.  Within this period, I finally found a way of eliminating the time-consuming part and the computational mistakes through supplementing it with a common computer software spreadsheet application, using Excel program. I had created an Excel file, a template designed for preparing T1-General Income Tax and Benefit Return. Each year, I update this template for new changes such as, new tax laws, increase amount of deductions, credits or new income tax rates, both for federally or provincially.

Besides supplementing my paper form T1- General income tax preparation with a spreadsheet program template file, the following steps are quite useful in preparing it

(1) Gathering Forms Needed in Preparing T1
Make sure that you have the proper forms that you wish to file (i.e. T1-General & schedules). You can download forms, publications, and other helpful information through the Canada Revenue Agency website

(2) Availability of Helpful References
Make sure that you have access to CRA General Income Tax and Benefit Guide for reference, either in hard copy or electronically in case you get stuck.

(3) Supplement T1 Preparation with Spreadsheet Template File
If you can make an Excel template to supplement your T1 paper return preparation the better.

(4) Collection of Source Documents
Collect all your T-slips, pay stubs, receipts, forms related tax files, documents and information. Make an envelope for each account, label each one of them. This recent related article can be useful to perform this task as well.

(5) How to Begin the Calculation Process
Start with the reporting of your Total Income for the year, then the Net Income, Taxable Income, Calculation of available Non-refundable Credits, Total Payable, Total Credits and end with the Balance or Refund Amount section.

(6) Total Income Calculation (Line 101-150)
Collect all your source of income information. File them accordingly as they are listed in the T1-General Form. You might have to prepare a schedule related to business, professional, commission, farming & fishing income. Also, you might have to prepare a schedule for interest income, partnership income (i.e. only for non-active partner or considered as passive income). Please note that income from an active partner or non-passive income is reported in a schedule that is also the same for a sole proprietorship. In addition to the mentioned source of income, an income from rental, capital gain or other type of income have to be included, and likely, require a completion of schedules as well.

(7) Calculation of the Net Income (Line 150 - 236)
Basically these are deductions that you can deduct dollar for dollar to arrive into Net Income. Collect all your T-slips, receipts, schedules, forms, documents and related information that apply to this section.

(8) Calculation of the Taxable Income (Line 244 - 260)
The items included in this section are also a dollar for dollar deduction. The most common ones are the amounts you reported from Line 144, 145 & 146 to arrive into the total amount in Line 147. This Line 147 you reported in Line 147, as income becomes a deduction in Line 250 to arrive into your Taxable Income.

(9) Calculation of Federal and Provincial or Territorial Taxes
Before you can calculate your Taxes Payable, you have to complete two schedules. First schedule, the Schedule 1 – Federal Tax, which includes 3-steps. These steps are the calculation of: Step-1, the calculation of your Federal Non-refundable Tax Credits; Step-2, Federal Tax on Taxable Income and Step-3, Net Federal Tax.

The second schedule you have to complete is a schedule to use in calculation of your Provincial or Territorial Tax. For example, for taxpayers that live in British Columbia, they use a schedule called, BC428 – British Columbia Tax. This second schedule is somewhat similar to Schedule 1. It includes 3-steps in calculating the Provincial or Territorial tax. Basically, these two schedules are use for calculating Net Federal and Net Provincial or Territorial Taxes, based from allowable, non-refundable credits and other type of credits.

(10) Calculation of the Total Payable (Line 420 - 435)
Once you have calculated the Net Federal Tax and Provincial or Territorial amounts, then you can calculate the Total Payable amount.

(11) Calculation of Total Credits (Line 437-482 & Line 435-482 (Balance Owing/Refund)
The last section to calculate is the Total Credits, to arrive into your total Balance Owing or Refund Amount. The most common credits are the total income tax deducted, and income taxes paid by installments related to the tax year.

(12) Completion of Your T1-General
Before you send your completed T1-General, make sure that you have signed and dated the form. If you wish that you require your refund to be deposited to your bank account, then fill out the required information and necessary documents. Lastly, before you seal the envelope, make sure that all the necessary schedules, T-slips, receipts, forms, receipts and documents you need to include with your T-1 General Income Tax and Benefit form are attached in the middle of the 4 pages form.
Earla RiopelBSCom(USA), DipAcc(UBC)
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