Learning about taxes

They have taken $33.41 in deductions." Paul shows his pay stub to Omar and there are deductions for employment insurance EI and income tax... The common Canadian taxes and salary deduct

Learning about Taxes

2012 Edition

Our main character, Paul,

is a 17-year-old high school student who spends most of his free time with his friends Omar and Anya

Paul doesn't really

know anything about

income tax although he

has heard his

parents

talk about it

To earn some extra money, Paul has

started a part-time job

at a local store

He works after school

and on weekends

Paul works 12 hours a week and is paid $10.00* an hour

After two weeks of

working,

he is looking forward to getting his first cheque for $240.00

(12 hours × $10.00 × 2 weeks)

He has already decided how

he is going to spend his money

On payday, Paul stops by his work

with Omar to pick up his cheque

When he opens his pay envelope,

he is disappointed to find that

instead of getting $240.00

…he only received

$206.59.

"What's going on?" Paul asks,

"Some of my pay

is missing.”

They have taken $33.41 in

deductions." Paul shows his pay stub to Omar and there are

deductions for employment

insurance (EI) and income tax

Paystub for Paul’s Job

"What are these deductions for,

like this EI?" asks Paul

"I think they are taking money from your pay for some different taxes," offers Omar

"Well, I don't know, but I am going to ask around I want to find out where

my money is going," says Paul, who

is now determined to learn about taxes "I would also like to know

where this whole thing of making people pay taxes got started."

"I don't understand this stuff,"

replied Paul, "What are income tax and employment insurance?"

Tax is a mandatory payment made

by individuals and corporations to government It can be levied upon things such as income, property,

and sales

Taxes are used to support the

government and the programs and services it provides

Federal taxes are used for programs such as National Defence, Old Age Security, Canada child tax benefit,

and transfers to provinces and

territories

Provincial and territorial taxes used for services such as bridges and

highways, education, hospitals, and wildlife conservation

Municipal taxes for services such as police, ambulance and fire services, libraries, parks and playgrounds,

public transportation, and garbage and recycling collection

The federal expenses for the fiscal

year of 2011-2012

1) who pays the tax

2) the tax base

3) the rates to be applied to the base

Video #1 – Introduction to Taxes

In Canada, there are various

taxes, tariffs, and duties

The common Canadian taxes

and salary deductions:

income tax;

employment insurance (EI) premiums; Canada Pension Plan (CPP)

contributions;

provincial sales taxes (PST);

and goods and services

tax/harmonized sales tax (GST/HST)

Paul and Omar now go to the bank where Paul deposits his cheque

and takes out some money to go

shopping They head to the mall to buy video games On the bus, the subject of taxes comes up again

"So, if some of my money is taken off

my cheque for these deductions, how come they didn't take any money off our cheques when we did that

landscaping job in the summer?"

Paul asks Omar

"My dad told me that I am supposed

to file a tax return at the end of the year and I might have to pay some taxes on that money then," replied Omar "You're going to have to file a return too you know.“

Income tax

is tax collected on behalf of the federal, provincial, and territorial governments The amount of income tax that you must pay is based on the amount of your

taxable income (money earned minus

allowable deductions) for the tax year.

Income tax is collected in various ways Paul's employer has

deducted income tax from his pay and remitted it to the Canada

Revenue Agency

This is called a

source deduction

because the tax was

deducted directly from Paul's

income by his employer

Paul didn't have deductions taken from his summer landscaping job

because in his particular case, he was not considered an employee

(he and Omar were helping Omar's neighbour build a patio and

landscape his backyard)

Employment insurance (EI)

provides temporary financial

assistance to unemployed Canadians who have lost their job through no

fault of their own, while they look for work or upgrade their skills

EI premiums have been deducted

from Paul's wages

If Paul becomes unemployed, he may be entitled to EI benefits

The Canada Pension Plan (CPP)

provides contributors with income

when they lose income because of retirement, death, or disability In the event of death, the plan provides

benefits to the contributor's

survivors

CPP contributions are not being

deducted from Paul's wages right now because he is under 18

However, when Paul does turn 18, his employer will begin to deduct CPP contributions from his pay

When Paul and Omar get to the

gaming store they check out the latest games Paul decides to buy one new game

When the cashier rings up the sale the total is $67.19

Paul says to the cashier,

“But the price sticker on the game says $59.99."

The cashier checks the receipt and responds, "Yes, that is how it rang up $59.99 plus tax."

"Oh, I forgot about tax," says Paul

He pays the cashier and hurries out

of the store with Omar, to go catch the bus home

Video #2 - Do I have to file?

What do I need to file my taxes?

Even though Paul may not have to file a tax return, he may want to

By filing a tax return, he could

qualify for a tax refund, credit or

benefit.

Anya, Paul and Omar take the bus to Omar's house and on the way they

begin to discuss taxes again.

"So, you said earlier you might get money back if you filed a tax return How does that work?" asked Omar

"I'm learning about taxes as I go,"

said Paul, "but I'm fairly sure that if I paid too much tax I'll get a refund."

Video #3 – Sources of Income

You are entitled to a refund if you

-had too much tax withheld during the year

"I know some people get money for other reasons My mom gets a payment called

the GST/HST credit," said Paul.

"Also, you know Ali's sister Fatima?"

asked Paul "Well, Ali told me that she gets the Canada child tax benefit to help with

the cost of raising her baby."

"We have to find out if we can get

something as well," said Omar.

Paul is not sure if he will owe

income tax for 2012

However, he is hoping to get a

refund and is planning to file a

return

"I sure could use a refund myself,

right now," said Omar

"How do I file a tax return anyways?"

Generally, income tax returns are

due by April 30 th

Therefore, Paul and Omar should file their

2012 tax returns between mid-February and

April 30, 2013.

You need a

T1 General.

A paper

copy can be obtained from a

Canada

Post outlet

Filing options

The CRA encourages all Canadians

to file their taxes electronically to

reduce costs, achieve greater

accuracy and faster processing,

and be environmentally friendly

The CRA's electronic tax-filing

services are known as NETFILE

and EFILE You can also mail a

paper tax return to your tax centre

It usually takes about four to six

weeks to process paper returns and two weeks to process returns filed

using NETFILE and EFILE

"So what happens after you file your tax return?" asks Anya "What if you make a mistake or forget to claim

something? What if you don't agree with whatever changes they made on your tax return?"

"Then I guess I can tell them that I

don't agree with them," responds

Paul

"I think you should find out if you can

do that, just in case," says Anya

After the CRA processes your tax

return, we will send you a

any changes or corrections made

(such as identifying and correcting a math error)

The notice will indicate if you are entitled to a refund or if you have a

balance owing

Paul wants to get his refund as

quickly as possible so that he can buy a new skateboard

He has decided to

start direct deposit,

one of the electronic

services the CRA

offers to individuals

How the CRA gets information

Completing a Personal Tax

Return TD1

To file a paper return, you will need the following:

The General Income Tax and

Benefit Guide

the T1 General,

Income Tax and Benefit Return

forms specific to your province

or territory of residence.

all of your information slips

(such as, T4, T5 and T2202A

slips);

information relating to any

amounts to be included in

on an information slip

receipts for any deductions or credits that you intend to claim

paper, pen, pencil, and an eraser;

a calculator (to find the calculator

on your computer, click the Start button, then select Programs,

then Accessories and Calculator)

Video #4 - Preparing to file

Now, let's take a look at Paul's

return!

A few days later, Paul went to his uncle's house to prepare his return

He didn't pick up a tax return at the

post office so he is going to download one from the

CRA Web site

"We will begin with the T1 General

2012, Income Tax and Benefit

Return, and the Schedule 1,

Federal Tax

If we need any other forms or

schedules, we will get them then," replies his uncle

Paul takes a look at the return he downloaded, "How will I know what

to fill in?" he asks

"Every part of the form is labelled, usually with a line number," his uncle replies "You will fill in the lines that are right for you as you go along

We can look in the General Income

Tax and Benefit Guide if we need to

get more information on how to

complete a line.”

"So, because each line has a number, I can look it up in the guide?" asks Paul.

"That's right," replies his uncle

"Now let's get started

Do you have your T4 slip?"

Paul should become familiar with the information on his T4 slip

before he starts to complete his

return

Employers should issue

T4 slips by the end of February

If you have not received, or have lost or misplaced a slip for the

current year, you have to ask your employer, or the issuer of the slip, for a copy

Let's take a look at Paul's T4 slip to find the following information:

the employer's name;

the year in which the income was earned; Paul's name and address;

Paul's social insurance number (box 12); Paul's employment income (box 14);

employment insurance premiums

deducted (box 18);

income tax deducted (box 22).

You will notice that box 28 is marked with an "X" This shows that Paul was exempt from paying Canada Pension Plan contributions during the past

year, since he was under 18 years of age

We will now follow along with Paul

as he completes page 1 of his

return Fill in your name and address

Add which province you lived in

as of December 31, 2012

Add your SIN, birth date and language you prefer and then

add marital status

Check the box(es) if you are a

Canadian Citizen or the box for

Elections Canada if you are old

enough to vote and want to be on the voter’s list

Paul ticks

“No” on the

GST/HST

box He is not eligible for the credit, as he will not reach

19 years of

age before

April 1, 2014

Paul gathers the information he

needs to calculate his total income

for last year He has his T4 slip

from his employer and after

checking his bank records,

he has determined that he

made $500 last summer when he

helped landscape Omar's

neighbour's backyard He is ready to start completing page 2 of his return

Paul ticks No as he did not own any

foreign property during the year

Paul enters his income from box 14

of his T4 slip on line 101, and

the $500 he earned landscaping on line 104

Paul does not have any other income to enter so he can now calculate his total income on

line 150

This is Paul's total income

He adds the amounts on lines 101

and 104 and enters it here

Paul is now ready

to calculate his

net income and

taxable income on page 3 of his

return He copies his total income

from line 150 on

page 2 to

line 150 on page 3

Lines 206-232 - Paul does not have any

deductions for 2012

tx/rtrn/cmpltng/ddctns/menu-eng.html

Line 260 -

Paul enters the amount from

line 236 here This is his

taxable income

Before he can complete page 4

of his return, Paul will need to

complete Schedule 1 to calculate his federal tax

Schedule 1 is used to calculate the non-refundable tax credits and the federal tax on taxable income It is divided into three sections:

Step 1 - Federal non-refundable tax credits;

Step 2 - Federal tax on taxable

income; and

Step 3 - Net federal tax

Step 1 - Federal non-refundable tax credits

Non-refundable tax credits reduce your federal tax

However, if the total of these credits

is more than your federal tax you

will not get a refund for the

difference This is why they are

called "non-refundable"

Paul enters the basic personal

amount of $10,822 on line 300

You can claim the basic personal amount if you live in Canada

throughout the year If you

immigrate to Canada or emigrate from Canada during the tax year, the basic personal amount you

can claim is based on the part of the year that you were resident in Canada

Line 312 - Paul enters $26.35, the amount from box 18 of his T4 slip

as he can claim the employment insurance premiums he paid in

2012

Line 363 - Paul enters $1,095 as he has employment income of $1,940 (line 101 plus line 104) and is

eligible for the Canada employment amount

The Canada employment amount

you can claim is $1,095 or the total

employment income reported on

line 101 and line 104, whichever is

less.

Line 364 - Paul enters $600

($50 × 12 months) as he can claim the public transit amount for his

monthly bus passes

Note

You can claim the total amount paid for public transit passes for 2012 This includes the cost of monthly passes or of longer duration such as an annual pass for travel on public transit.

Let's take a look at Paul's Schedule 1

Line 335 - Paul does not qualify for any other federal non-refundable tax credits so he adds up the amounts

and enters the total here

Line 338 - Paul multiplies the

amount on line 335 by 15% and

enters $1,881.50 here

Line 350 - Paul copies $1,881.50

here This is his total federal

non-refundable tax credits

These are his calculations

Step 2 - Federal tax on taxable income

Line 32 - Paul enters his taxable

income which he calculated on

page 3 of his return

Line 33 - He enters $1,940 in the first column since his taxable

income is less than $42,707

Step 3 - Net federal tax Lines 40 and

42 - Paul enters the $291 he

calculated in Step 2

Lines 43 and 47

- He enters $1,881.50 (the amount of his non-refundable tax credits he

calculated in Step 1)

enters the

amount from line

48 here

see Line 420 - Net federal tax

Paul can

now

continue on

to page 4 of his tax

return

Line 420 - Paul enters

"0" from line

58 on

Schedule 1

Using Form 428 for his province or territory of residence, Paul

determines his provincial or

territorial tax on line 428 also to be zero

Note

Amounts calculated and entered on lines 428 and 479

vary for each province and territory For the purpose of this example, Paul's provincial and territorial amounts are zero For information about the provincial or territorial tax and credits for your province or territory, see

Provincial and territorial tax and credits for individuals