Tax season is stressful enough without worrying about making a mistake on your tax return. At best, a blunder could leave you with a smaller refund. At worst, your tax return will raise red flags at the Canada Revenue Agency (CRA) and spur it to audit you, which can result in penalties and additional tax owed.
In this guide, we’ve compiled a list of some of the most common errors Canadians make on their tax returns, including the precautions you can take to avoid them. We’ll also explain how to fix mistakes you’ve discovered after you’ve already filed. Take these tips to heart, and you can spare yourself from plenty of anxiety during tax season.
Mistakes to avoid when filing your taxes
Not reporting all your income
You’re legally obligated to report all your income streams on your tax return, not just what you earn from your regular day job.
You might be surprised as to what sources of income you need to report to the CRA. Here are some examples:
- Tips and gratuities earned from working as a server in a restaurant
- Rental income earned from renting out your home on Airbnb or renting out a secondary property that you own
- Income earned from streaming platforms, such as Twitch and YouTube
- Profit is from the sale of investments, such as stocks, bonds, precious metals, and cryptocurrencies.
- Income from online platforms in the gig economy, such as Uber, DoorDash, Upwork, Appjobs, and Hugo
- Income earned from running an online business or side hustle, such as operating an e-commerce site, selling crafts on Etsy, or providing freelance tutoring.
- Certain types of scholarships, bursaries, or fellowships
Learn what income sources are taxable by the CRA. If you collect a steady income from a source other than your full-time job, it’s wise to assume the government wants a cut unless you can prove otherwise.
Filing too early
At first glance, filing your taxes early seems like a savvy move. It’s one less dreaded task you can clear off your plate, and you’ll get your refund sooner, too. But rushing to file your return may result in more problems than benefits.
First, you need time to get a hold of and organize your paperwork. Suppose you lack certain documents to process your return, such as tax slips and receipts. In that case, you risk making significant errors that could lead to CRA penalties or a smaller refund.
Second, by filing prematurely, you miss the opportunity to structure your tax situation in ways that can lower your tax liability. You may overlook valuable tax deductions, forget to offset capital gains with capital losses, or fail to utilize income splitting with your spouse.
We recommend waiting until March to file your income tax return. During January and February, collect your supporting documents and examine strategies for minimizing your tax bill.
Overlooking key credits and deductions
There’s a wide range of deductions and credits you can take advantage of during tax season, saving you hundreds or even thousands of dollars. But if you’re not aware of them, you won’t claim them in the first place. A study conducted by researchers at Carleton University found that Canadian taxpayers lost over $1.7 billion in tax benefits in 2015.
Here are some examples of tax breaks Canadians frequently overlook:
- Tax credit for interest paid on government student loans
- Tax deduction for union dues
- Tax credit for a qualified disability (known as the disability tax credit)
- Tax credit for home office expenses paid out of pocket
- Tax deduction for moving costs incurred to run a business or start a new job
- Tax deduction for medical expenses
- Tax credit for money paid for the purchase of a new home (known as the Home Buyers’ amount)
- Tax deduction for carrying charges related to an investment account
Visit the CRA website to familiarize yourself with the various tax-related benefits available.
Claiming ineligible expenses
While there are many deductions and credits you can use to minimize your tax bill, some expenses you cannot claim, even if they seem legitimate.
For example, the CRA disallows personal expenses, such as wedding costs, loans made to family members, and losses arising from the sale of personal-use property (car, principal residence, etc.).
Be careful when claiming business deductions. Always separate business-oriented costs from personal expenditures. For example, if you purchased fuel for your vehicle, you can only deduct the portion that pertains to a business trip.
A common mistake is claiming the interest incurred on private student loans or lines of credit. Only borrowing costs related to government student loans qualify for a tax deduction.
Another source of confusion concerns renovations done on rental properties. If you spent $25,000 revamping the kitchen, you cannot claim the entire amount as an expense in the year you incur it. Instead, you must spread the cost over several years using capital cost allowance (CCA).
Browse the CRA’s list of eligible expenses to learn which you can claim against your income. If the rules are vague, contact the CRA to clarify whether a particular cost is tax-deductible.
Making calculation errors
Anyone can mess up their math when filing a tax return. These errors can lead to inaccurate numbers being reported to the CRA, which can cause delays in processing your refund.
Luckily, the CRA catches most small mistakes, rectifies them, and provides details of the corrections on your notice of assessment. However, in some cases, you may end up owing more taxes, and glaring errors may prompt the CRA to conduct an audit.
Use tax software to file your taxes rather than paper-based returns. These programs are efficient, easy to use, and, most importantly, will automate all the calculations, reducing the likelihood of errors slipping through.
Failing to update your personal information
Keep the CRA updated regarding your personal information, including your address, phone number, marital status, and the children in your care. If something changes, update your profile right away. You can do this online through your CRA My Account.
While failing to inform the CRA about your personal details isn’t an alarming mistake, it still has significant implications.
For example, outdated information can prevent you from receiving certain government benefits. In some cases, you may even have to return some of the funds you receive. Some examples are the Canada Child Benefit (CCB) and GST/HST tax credit, whose eligibility hinges on the spouse’s combined income.
Not retaining your supporting documents
Do you claim a wide range of expenses on your tax returns, such as tuition, childcare, medical, professional sdues, charitable donations, and employment-related costs? If so, don’t immediately toss them in the trash after you’re done filing.
Why? The reason is that these documents prove that you incurred the expenses you deducted. The CRA may ask you to supply copies of these documents for review. Should you fail to produce them, it may deny your previously claimed expenses, which means you’ll get hit with a new tax bill.
Be diligent about storing all the paperwork necessary to justify your tax deductions. Keep digital copies in a central location, such as a file folder on your desktop. It’s also prudent to store a backup of your files on an external hard drive. Do the same for income-related tax slips, such as T4s, T4As, and T5s.
The CRA recommends taxpayers retain their tax slips, receipts, and other supporting documents for six years in case of a review or audit.
Missing the tax filing deadline
Filing late is one of the most common mistakes people make during tax season. The CRA can charge you with late filing penalties until you’ve remedied the situation. The penalty is 5% of your balance and an additional 1% for every month you file past the due date for a maximum of 12 months.
The tax filing deadline for most taxpayers is April 30. If you’re self-employed, you have until June 15. However, if you owe money to the CRA, you must pay the amount in full by April 30, regardless of when your return is due. Otherwise, interest charges will begin accumulating on the unpaid amount.
Not setting aside money
If you expect to pay taxes this year, budget for this expense beforehand. Otherwise, you’ll find yourself scrambling to scrape together the money. As mentioned, missing the deadline will result in interest charges accruing on your balance, making it even more challenging to catch up with your tax debt.
Setting aside the required funds to pay off your tax liabilities is especially important if you’re self-employed. Unlike an employee whose taxes and CPP contributions are deducted from their paycheques, you’ll be responsible for paying everything in one lump sum when filing your return.
If you are operating on a tight budget or other debts are holding you back from saving the money you need, check out the following articles:
- Tips for Paying Your Taxes When You’re Struggling with Debt
- How to Manage Debt When Living Paycheque to Paycheque
How to fix errors made on your tax returns
Did you realize you made an error on your tax return after filing it? Don’t worry! The CRA understands mistakes happen and allows you to make corrections to your return.
Before fixing your error, wait for your notice of assessment (NOA). Once received, sign into your CRA My Account and select “Change my return” to submit your request for an adjustment. You can also complete the process using the same tax software you used to file your return.
An alternative way to fix a tax return mistake is to fill out Form T1-ADJ T1 Adjustment Request and mail it to a CRA tax centre.
If you complete your request online, the CRA will review and approve your changes in about two weeks. (expect about eight weeks for mailed requests). You’ll receive a new NOA that explains the changes made.
You can revise tax returns as far back as the last ten calendar years, so there’s plenty of time to catch up if you’ve fallen behind on tax filings.
What if your tax return mistakes cost you more than you can pay?
Sometimes, a tax return mistake can result in a hefty tax bill. But what if you cannot afford to pay the balance in full by the deadline?
In that case, consider making a partial payment to the CRA to minimize the interest charges, which will start accumulating on your balance on May 1. Then, revise your budget and cut costs wherever to free up cash so you can pay off what’s left.
You can also contact the CRA to negotiate a payment schedule, allowing you to settle your tax bill over time. Another option is to plead financial hardship under the taxpayer relief provision; if successful, the CRA will waive your interest and penalties.
If all these options aren’t feasible, consider filing a consumer proposal to deal with taxes. A consumer proposal is a legally binding agreement between you and your unsecured creditors (including the CRA), allowing you to repay a smaller portion of your debts over five years. It’s an effective solution if you’re grappling with debt problems because it reduces the amount you owe creditors, making repayment more manageable.
The bottom line on tax return mistakes in Canada
Most tax return blunders result from ignorance and inadequate preparation. Therefore, dedicate time to learning about the tax rules affecting your household and start assembling your paperwork in March or early April at the latest. If your tax situation is complex, seek the advice of a tax expert or contact the CRA for guidance. And if you make a mistake, don’t fret—you can always adjust your return.
The most harmful tax mistakes can leave you with a steep tax bill, one that you’re unable to pay off by the due date. If you’re struggling to pay off your taxes and need help finding a solution, book a free consultation with David Sklar & Associates. Our seasoned debt experts can assess your predicament and determine the best way to get the financial relief you need.
Whether it’s consolidating your debt, working with the CRA, optimizing your budget, or applying for a consumer proposal, we’ll help you navigate your way out of tax debt for good.
