Pop quiz: what is the largest single expense you'll have over your lifetime? If you're thinking it's your home, your car, or your kids, you'd be wrong. It's your tax bill.
Indulge us for a moment and think back to the year 1999…did you immediately think of your hair? Yup, like you, we too were growing out "The Rachel". You were also most likely rushing home from work to watch "Who wants to be a millionaire", and dancing to the tune of Ricky Martin's "Livin' La Vida Loca", all while you basked in the glory of an overvalued tech portfolio. Life was good.
But wait! Who could forget when the Federal Department of National Revenue created the Canada Revenue Agency (CRA) - you do remember that one, right? Okay, probably a long shot, but why is that so important?
More than just a name change
According to Alan Rowell, President of The Accounting Place, although the change by itself may have appeared to be "no big deal", the effect on the Canadian taxpayer has been huge. Alan advises that being an agency as opposed to a government department means that CRA is not responsible to ensure that the correct amount of tax is paid; rather, they are responsible to ensure that at least the correct amount of tax has been paid within the legislative framework. You see where we're going with this?
Alan explains that there was a time when you might get help from the taxman, but that was when they were a government department and perhaps felt more loyalty to their "employer"- you the taxpayer. Now, they are a government agency; this means, you're on your own, folks!
Evidently, there is so much more to the name change - from Revenue Canada to Canada Revenue Agency - than meets the eye.
What you may not know about CRA
We have a self-assessing income tax system, says Alan, and herein lies the problem. What this means is that as long as you report all of your income and don't break any rules, it's correct as far as CRA is concerned; you get your notice of assessment back (and maybe even a refund), and cha-ching, you're running straight to the bank. Unfortunately, just because you received a clean assessment doesn't mean that the return was completed so that you paid the least amount of tax possible; you see, CRA is not obligated to tell you when you overpaid.
As Alan Rowell explains further, if you overpay in the current year, you will then likely keep overpaying year after year. Perhaps more frightening, like many Canadians, you may have been over-paying for years. And here's why…
Not all tax preparation is created equal
Alan explains it like this: as a taxpayer, there are many legal ways for you to file a tax return. You can use a pencil and paper, or you can use the latest version of the tax software available at your nearest electronics store - and while the return may be "technically" correct, only one way will result in your lowest tax bill.
A CRA revelation
Indeed, according to Evelyn Jacks, Founder and President of The Knowledge Bureau and Canada's most trusted voice on tax matters, the secret you may not know is this: you can go back up to 10 years, in most cases, and adjust tax returns wherein you may have missed something. And this might just mean your lowest tax bill ever — and ongoing. "If you've missed the disability amounts, for example, which in real dollars could be just under $2,000 per year over 10 years, well that's a big cheque," she says.
A golden opportunity?
So now that you know the secret, what should you do? The best place to start, says Alan, is to gather up the last 10 years' tax returns and engage in what he calls a "tax recovery audit." This may also be referred to as a post-tax review, says Evelyn. Review your life milestones over the past 10 years with your professional tax advisor - such things as your employment, investment, and health history - to uncover areas you may have missed. According to Evelyn, the most commonly missed items include your safety deposit box, medical expenses, disability amounts, capital losses from your investments, even carry-forwards from your tuition. Another item not to be overlooked, says Alan, is wasted deductions. In many cases, deductions and credits are elective and you can choose not to claim them and instead carry them forward to future years when it is more optimal for you.
Once completed, you can then work with your tax advisor to make the necessary adjustments. If you know what you've missed, you can write CRA a letter, attach supporting documentation, and ask them to adjust your returns; or download the form T1-ADJ from the CRA website.
In cash we trust
The benefits of engaging in a tax recovery audit are two-fold; firstly, it repatriates your hard earned money from the government coffers and puts it back into your bank account where it rightfully belongs (you earned it, right?). And secondly, it helps establish a strong foundation with your advisors, thus ensuring a tax-efficient plan going forward wherein you pay only the tax that you are legally obligated to pay and not a penny more.
And in these challenging economic times, we're all for those extra pennies. In a world of rising prices, tighter budgets, heavier debt loads, and volatile stock markets, being vigilant on your tax return is one of the best places to find hidden value and further your long-term wealth creation. In many cases, you'll find money that until today, you didn't even know you lost!
GoldenGirlFinance.ca is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.
