Personal Income Tax (T1)
Most people who live and work in Canada are required to file personal income tax returns each year. The obligation to file a return is not based on age. If you earn Canadian-source income during a tax year, you will likely be required to file a tax return. Even if you are not required to file a return, it might still make sense for you to do so if you might receive a refund or have credits that you can save and claim in a future tax year. You need to understand the T1 personal income tax return, when you are required to file it, the documents that you will need to gather, and the penalties that you might face if you file your return late or fail to file it.
Table of Content:
- What is a T1 return?
- Why do people have to file income tax returns?
- I do not work and do not have any income. Do I need to file a tax return?
- Do non-residents need to file income tax returns?
- How do self-employed people file income tax returns?
- What documents are needed to file income tax returns?
- What is the personal income tax rate?
- Impact of filing late or failing to file.
- Benefits of having Ensight Cloud CPA do your personal income tax return.
What is a T1 return?
The T1 income and benefit return is the tax return that individuals file to report their incomes from Canadian sources each year. The T1 return is used to report income from all sources in Canada, including the following:
- Employment income
- Self-employment income
- Rental income
- Capital gains
- Foreign-source income
- Rental income
- Taxable portions of grants, scholarships, bursaries, and fellowships
- Timber royalties
- Other types of income
The T1 personal income tax return is normally due by April 30 of the year that follows the tax year.
Why do people have to file income tax returns?
Canadian residents and certain non-residents are required to file personal income tax returns each year when they earn taxable Canada-source income under the Income Tax Act. This means that people who earn taxable incomes must file tax returns each year to comply with the law. In addition to following the law, it is important to file income tax returns for other reasons. If you want to claim certain benefits or credits, you must file a tax return. The government relies on the tax revenues that it receives to pay for infrastructure, maintain highways, provide old-age benefits, provide health benefits, and other benefits to Canadian residents and citizens. Filing income tax returns and paying taxes is important for the common good.
I do not work and do not have any income. Do I need to file a tax return?
You are not required to file a personal income tax return if you have a $0 income or a negative income for a tax year. However, if you want to claim certain credits or benefits, you should file a tax return even if you do not work and do not have any income for a particular tax year. Some of the reasons to file a tax return when you did not earn an income or work during a tax year include the following:
- You want to claim a refund.
- You want to declare tuition credits that you can use later.
- You want to qualify for quarterly general sales tax payments.
- You want to receive the Canada child benefit.
- You want to receive the guaranteed income supplement.
- The CRA sent you a request to file a return.
- You incurred a loss that you would like to deduct in a future tax year.
To claim these types of benefits, you must file an income tax return even if you did not earn an income during the tax year.
Do non-residents need to file income tax returns?
People are considered to be non-residents of Canada for tax purposes if they normally live in a different country, do not have substantial residential ties to the country, live outside of Canada during the tax year, or stay in Canada for fewer than 183 days during the tax year. Non-residents must file income tax returns in Canada if they owe taxes or want to claim refunds.
Non-residents pay taxes on the income that they receive from Canadian sources. In most cases, the income that is earned by non-residents will be subject to taxes under Part XIII or Part I. The types of income that you might earn from Canadian sources that may be subject to Part XIII taxes include the following:
- Annuity payments
- Canada Pension Plan benefits
- Management fees
- Old age security pension
- Pension payments
- Rental income
- Retirement income fund payments
- Retirement savings plan payments
Part XIII taxes should be deducted from these types of income from Canadian sources. People should make sure to tell their Canadian payers that they are non-residents and the countries where they are live.
When you complete your tax return, you should not include income that has already had Part XIII taxes deducted from it. Part XIII income is subject to a 25% tax rate and should be deducted at the time of payment. Certain countries that have tax treaties with Canada may have a lower tax rate. Part XIII taxes are not able to be refunded. This means that you should not file an income tax return if your income is only subject to Part XIII taxes unless your Part XIII income is from rental properties in Canada, timber royalties, or certain types of Canadian pensions.
If you choose to file and report Canadian rental income or royalties from timber, this income must be reported on a separate tax return. You will not include other types of income on the separate return. This means that you might have to file two returns for a tax year.
If you receive Part I income from Canadian sources, the payers normally deduct the tax at the time that you are paid. While Part I taxes may be deducted from your income, you might still need to file an income tax return to determine what your final tax obligation to Canada might be for the following types of income:
- Employment income in Canada
- Business income in Canada
- Employment income for Canadian residents who live and work in other countries if they are exempt from taxes in the countries where they work under a tax treaty with Canada
- Taxable portions of Canadian fellowships, grants, scholarships, and bursaries
- Taxable capital gains from selling certain types of Canadian property
- Income earned from providing services in Canada
- Income earned outside of Canada when the person was a Canadian resident at the time that it was earned
The income tax package that you should use will depend on the type of income that you earned during the tax year. If your Canadian income was solely derived from business or employment, you should use the package for the territory or province where the income was earned with Guide T4058. If you also earned other types of income, you will need to also use Form T2203. If you only received other types of Canadian income, you should use the income tax package for non-residents of Canada.
Your return must be filed by April 30 of the year that follows the tax year. If you operated a business in Canada, your return will be due by June 15.
How do self-employed people file income tax returns?
The Canadian government views self-employed people as sole proprietors as soon as they begin exchanging services or goods for money without an employer. When you are self-employed, your business and personal income are the same. This means that your self-employment income must be reported on your T1 income tax return. The income that you earn as a self-employed person for which you do not receive a T4 slip is reported on line 104. In addition to the T1 return, you will also need to complete Form T2125. This form is used to report your deductible business expenses. If you are a self-employed independent contractor, each client for which you work during the tax year must send you a T4A slip. These forms should be used to determine how much money you earned from each client and in total. Businesses that issue T4A slips to independent contractors are also required to send copies to the CRA.
Self-employed people do not have income taxes automatically withheld from their checks as employed people do. They also do not have any Canadian Pension Plan contributions withheld. This means that you will need to set money aside to pay your income taxes and your CPP contributions each year. You will need to determine which tax rate applies to you. The CPP contributions are taxed at a rate of 9.9% of your income. Businesses pay half of that amount for their employees. However, since you are self-employed, you are responsible for paying the entire 9.9% in addition to your income tax rate.
As a general rule, you should set aside from 25% to 30% of the income that you earn from self-employment to pay taxes when they are due. You will also want to keep good records of your business expenses and the money that you earn to make it easier when it is time to file your taxes and to protect you if you are chosen for an audit.
What documents are needed to file income tax returns?
When you file your return each year, you may need to submit other forms and supporting documents with your tax return. There are also some documents that you should save in case you are audited. When you are preparing your taxes, you will need the T1 form and all of the T4 slips that you have received from your employment. If you are self-employed, you will need any T4A slips that you have received from the clients with whom you contracted during the tax year. The forms that you will need to file in addition to the T1 form will depend on your particular tax situation and whether you have credits to claim. Any additional forms that you need to complete should be attached to your T1 form and submitted with it.
There are multiple types of credits and deductions that can be claimed when you file your personal income tax return. For example, credits are available for the costs of childcare, adoption, medical expenses, children’s enrichment programs, certain athletic programs, and others. You should save your receipts and bank statements that show these expenses. While you will not send your receipts and documentation to the CRA, you will need it if the CRA audits your return.
What is the personal income tax rate?
The personal income tax in Canada is progressive. This means that people who earn higher incomes pay more taxes than people whose incomes are lower. The personal income tax rates are as follows as of 2019:
- 15% of your income up to $47,630;
- 20.5% of your income that exceeds $47,630 up to $95,259
- 26% of your income that exceeds $95,259 up to $147,667
- 29% of your income that exceeds $147,667 up to $210,371
- 33% of your income above $210,371
In addition to your federal income tax, British Columbia has a provincial income tax. It is also progressive and ranges from 5.06% on your income up to $40,707 up to a maximum rate of 16.8% for income that you earn above $153,900.
Impact of filing late or failing to file
If you file your return late, you will be assessed a 5% penalty on the unpaid tax balance that was owed on the filing due date plus a 1% monthly penalty for each month that your return was late up to a maximum of 12 months. If you were charged a late filing penalty for a return in the previous three years, your penalty will be 10% plus 2% each month that it is late up to a maximum of 12 months. If you fail to file a return and also failed to file a return in one of the three prior years, you will have to pay a repeated failure to file penalty. This is assessed at 10% of the amount that is due for the current tax year and 50% of the difference between the amount you failed to report and the amount that was withheld from your income. The CRA does have a voluntary disclosure program, however. If you voluntarily disclose your failures to file, the penalties might be waived.
Benefits of having Ensight Cloud CPA do your personal income tax return
Filing your personal income tax return on your own can be challenging. Even if you use software, you will likely miss out on some deductions or credits for which you might be eligible. Our tax and accounting professionals understand the tax laws and can help you to ensure the accuracy of your returns and that you receive the credits and deductions to which you should be entitled. Contact us today to schedule a consultation.