I’m currently reading “The Only Investment Guide You’ll Ever Need” by Andrew Tobias (great book, by the way – useful AND fun), and he says the real income tax rate is not your % bracket, typically 21.5% or 37% for example.

Since the system is graduated, you don’t pay any tax at all on the first few dollars, but you pay the highest percentage on the last few dollars. I used to calculate the tax payable in relationship to the full income – like most people. Usually it doesn’t look that bad, thanks to the deductions we pay under 15% of gross earnings (plus, of course the GST we collect from the clients and 14% tax we pay on purchases at the store. When you add these up, you end up with a much higher number).

What Andrew Tobias suggests is to see your true income tax rate, after you make all the calculations for the year, add on another $1,000 of income and see by how much your tax bill changes – the extra payable amount on that additional $1,000 will show you your real tax bracket.

I opened up our QuickTax file and added $1,000 to my income alone. It did not put me into a different federal or provincial tax bracket, yet it added $420 and change to my tax bill! 42% is my tax rate for every additional $1 until I get to the next tax bracket, and then it’ll increase some more. 1 penny saved becomes almost 2 pennies earned 🙁

I choose not to use NETFILE, because I read somewhere that NETFILE returns are “red-flagged” more often. It may be an urban legend, but our accountants have never NETFILE’d either (even though they were eligible to do it.)

Just got a promo email from Ufile outlining why you SHOULD NETFILE:
NETFILE is the fastest way to get your tax refund
We never get refunds, not a concern for us.

There’s a much lower risk of the CRA employees making an error when processing your return

The CRA’s NETFILE system can also catch certain irregularities in your return and report errors that might need to be corrected right away.
Then, they go on saying that if you use Ufile, you’ll make fewer mistakes. This goes for most tax software out there, doesn’t it. I think error-proofing is more of a point in favor of using some software to file taxes instead of manual calculations, not so much a NETFILE selling point.

When you file electronically, there is no need to sort, staple and mail all your tax slips along with your tax return.
Seems like there’s a higher chance of receipts being requested for verification. While not really an audit, it’s still a hassle. May as well bring/mail in the papers from the beginning.

Mortgage principal is not tax-deductible, so if you’re making a significant payment towards the principal, double-check what your tax liabilities will be in that year. Make sure you will have enough cash left to pay the taxes.

Of course, if you’re paying down the mortgage out of savings, you don’t have to worry about that. That’s how it works in Canada – you don’t pay taxes on capital gain when you sell your residence, but the money you pay for the house is taxed in advance, so you’re always paying down the principal with your after-tax dollars.

For those of you who just went, “Pffft, this is common knowledge”, sorry to bore you, but to those people out there who like me had no clue – just take note.

We made our downpayment out of then-current year’s income, and were hit pretty hard with a $11,000 tax bill the next spring. When we were buying the condo, I was 100% confident that the downpayment was a tax-writeoff! Not so, and imagine what a surprise it was. I felt pretty dumb, but then realized why I made the mistake. I lived in the States for a few years, and assumed that Canada was just like the US in financial aspects. It’s simply not true, Canada’s policies are very different in many ways. I’m still learning!

We’ve had three accountants over the last 9 years, and this year I’m doing our own taxes!

The first one was a referral, which unfortunately didn’t make him any less crazy and unpredictable. Long story short, he charged very little ($70!), did an OK job but he made me spend an entire day with him. I mean 8-10 hours out of which he spent about 40 minutes actually doing taxes. I had a feeling he liked my company a tad too much.

Then, one year he just disappeared with all our paperwork. He got divorced, moved out of his house, and the only means of communication with him was a Hotmail address. He responded to my emails just once, saying that he was ill but would soon return to his accounting duties.

After trying to pry our papers out of this nutjob for 2 years, I finally gave up and decided we needed a change. By then, we’d been making installment payments just in case, so even though we didn’t file formal returns, once we did file them, we ended up getting a small return and didn’t get penalized.

We got a “cold” letter from this freelance accountant/bookkeeper, that I kept for about 3 years. We’ve had cold calls from accountants before, but I kept the letter, and never wrote down information from the cold callers (hey, here’s a marketing tip right here – direct mail YES, cold calls NO). We contacted the lady, and she turned out to be a pretty nice and hard-working person. She was the only one that made me feel like she looked out for our interests. Unfortunately, she just didn’t have enough experience to continue working with us after we incorporated. She charged about $250 for a 2-person return (partnership and personal returns).

The last one was also a referral. He was not just the most expensive, but also the laziest and least helpful of the three. Basically, I believe we wasted with him anywhere from $1,200 to $5,000 with him in extra fees and re-assessments from CRA which he was too lazy to dispute, not to mention that he made the mistakes in the first place.

Except for the 2 years with the freelance lady accountant, filing taxes has been a total nightmare for me, and a huge stress.

In our experience finding an accountant who would actually be helpful has been impossible so far. Referrals are no guarantee that it’ll be a good experience.

Last year at a Christmas party I started talking to this guy who turned out to be an accountant. He was giving everyone free tax advice with enthusiasm. We started chatting. I was still in shock at how much we paid in accounting fees (right after filing our first corporate return). The guy asked, “Why are you even using an accountant? Your tax situation is not so complicated that you can’t buy QuickTax and file your own returns, including corporate”.

What a great idea! See, it didn’t even occur to me before that moment that I CAN DO OUR OWN TAXES! I think for most people it goes the other way around – they do their own taxes first, then maybe graduate to using an accountant. But for me the first years in Canada and first years of business were hard and stressful enough, I wasn’t up to learning this too at the time.

This year we bought QuickTax Unincorporated Business edition and I did our own taxes. Filed them today and very anxious to find out what happens.

For any given tax year, I use just 2 manila folders and an expandable box file to organize our tax papers.

Manila Folder 1: Throughout the year I have a folder tabbed “Tax bin”. All paperwork pertaining to taxes is filed in this folder, as it comes in. Except receipts – these are kept in a zipped cloth envelope.

I file the Tax Bin horizontally in between my 3-ring binders. It stays put that way, is easy to pull out and doesn’t interfere. When tax time comes, I use it to keep all my transitional income and expense worksheets.

Manila folder Expandable poly file box

Manila Folder 2: After everything is filed with Revenue Canada, I take another manila folder, label it with the tax year, i.e. “2006 Taxes” and put copies of our tax returns and copies of T-slips in there. This is what I file in the expandable box file. When notices of assessment come in, I add them in to this folder.

I end up with a separate folder for each tax year, and a running tax folder for the current year. Not much to it, but I’ve been doing it this way since 1999 – after trying out more complex setups. This is a very low-cost system, and works great for me.