We Get it, nobody wants to pay taxes, but did you know a lot of advice on tax savings will end up costing you MORE in taxes in the long run?
In today’s article, I am going to shed some light on the not so pretty TRUTH about common tax savings advice that so many people are giving out online.
Introduction to Tax Free Myths
We are bookkeepers and tax preparers in Calgary, Lethbridge, and southern Alberta. We have decades of experience in a wide variety of clientele.
As such, we strive to bring you accurate and dependable details, and in no way does this article constitute tax or financial advice.
We can’t possibly give generic advice to everyone out there without first determining where they are at financially.
We cannot make any guarantees that any of these points in the article will benefit you or apply to you. It is always best practice to contact a tax professional, so please give us a call to discuss more about tax savings options that will work for your situation.
Myths 1- 6 are things that many people ask us questions about, while myths 7 – 9 are some far-out strategies and ideas that the odd person tries to take.
Myth 1: Use Business Deductions to Reduce Income to Zero
Typically when someone is deducting business expenses against their income down to zero, you start to wonder if the business expenses are legitimate/allowable.
Yes, you can use legitimate business deductions to reduce income, which will reduce the tax. This is not a bad strategy for starting a business if done within reason.
However, when Zero net income becomes the goal, the temptation can and does set in to write off anything and everything you purchase.
Sooner or later, the CRA will start to wonder how you are continuing to do business year after year without any income. This could trigger an audit, and audits can cost you much more in penalties and fees than the original tax would’ve.
Best practice is to determine what you need to pay yourself and take those payments out of your business through either dividends or payroll. Use additional funds your business makes towards advertising if you could handle more business, or assets that will increase revenue.
By paying yourself reasonably you not only possibly avoid triggering an audit, you’ll be growing your business in a way that would not detour potential buyers in the future.
Sooner or later, the CRA will start to wonder how you are continuing to do business year after year without any income
Myth 2: Loans are Not Taxed When Taken
With the availability of credit these days, it is tempting to take out loans to get a business up and running faster. While it is true that you do not pay any tax on loans in the year that you take the loan, you have to pay tax on the income used to pay back the loan.
Not only do you have to pay tax on the income used to pay back the principle of the loan, you also have to pay interest on the loan. While the interest is tax-deductible and can be used as a business expense on your tax return, wouldn’t you rather keep those interest payments?
Some businesses require high capital to start, and loans are necessary. Just know that over leveraging can lead to your profits going straight to interest payments and eventual insolvency. Over leveraging for the purpose of tax savings does and will come back to bite you in the end, so only take on necessary debt in your business.
Myth 3: Max Out Government Program Plans to Save Taxes
While this may be great advice for some people, it’s terrible advice for others. As a tax preparer, I’ve seen this strategy cost people dearly.
You should not use RRSP and TFSA programs for rainy day savings accounts, because there could be penalties for withdrawals or for not paying back borrowed amounts against the TFSA or RRSP.
If you are in a situation where income is unpredictable or there are good years and bad years, make sure to have a conventional savings account in addition to the registered retirement accounts. The government programs for retirement should be strictly for retirement so as to avoid unnecessary penalties and fees.
Myth 4: Paying Yourself Dividends eliminates Taxes
This is a hot topic as many business owners choose to incorporate their business to avoid paying payroll taxes, and some even believe it they will pay no income tax by paying themselves dividends.
There is some truth to this, but the dividend from the corporation is “After Tax”, meaning you’ve already paid tax through the corporation on your dividend income.
When you add up the amount you would’ve paid in payroll (which is 100% deductible for the corporation) and compare it to the amount you pay in tax through dividends (the roughly 11% tax the corporation pays, plus any personal tax you pay on the dividend), there IS a tax savings by paying yourself through a dividend, but it will by no means wipe all taxes paid on that money out.
Myth 5: Home Office Expenses to Reduce Income
Just set up a computer in your living room and you can deduct the square footage of your living room as a percentage of your home as a home office, right?
Well, you may be disallowed to do that if you get audited. A home office should be solely used for business purposes. Even if you use a room in your house for office work 9-5 and you also use it as a spare bedroom when the in-laws come over, it might be disallowed because the sole use of the room was not for business.
Home office audits used to be quite common because few people abide by these rules. Some business owners went so far as to divide a room in half with masking tape on the floor, saying that a portion of the room was solely for business use, while the other side of the room was personal. At least they could claim something for a home office instead of losing the entire deduction in case of an audit.
Myth 6: You Can Deduct GoFundMe Donations
No, GoFundMe donations cannot be deducted as Charitable donations. Check out this article, which is a complete guide to charitable donations in Canada. You can find out more about what is allowable and what isn’t.
GoFundMe donations can possibly be deducted from your tax return to save on taxes legally IF the done is a registered charity in Canada. If not, which the vast majority are not, it is not tax deductible and cannot reduce your taxes owed.
Now let’s get to some outlandish ways that some people try to get out of paying taxes altogether.
Myth 7: Income Taxes are Contractual, and I never signed a Contract
This comes from the common law, or law of the land idea. I am not going to argue for or against free man on the land. It is a very interesting topic. I will argue that it’s not going to fly in the courts and it will end up costing you in the long run.
If you live in Canada and earn an income, expect to pay taxes. Trying to beat the system may not work out so well. There are people that seem to successfully beat the system, but ask yourself if the cost is worth it. Often these people cannot get any credit, making it nearly impossible to own a home or conduct a normal life.
A better option would be to research countries that have little or no income tax and consider moving. It’s an extreme decision, but it may be better than trying to beat the government in the long run.
Myth 8: Taxes Are Voluntary In Canada
Yes, in the sense that if you don’t want to pay taxes, don’t make any income. Believe it or not, this is actually a legal way to avoid paying taxes that works 100%, but few people want to do that. There is a movement of doing this, it is called “Going Gault”, named after a character in the Ian Rand book “Atlas Shrugged”.
The idea is to starve the government by not feeding them any tax money. It might work if everyone did it all together, but until then you’re going to need to make something.
Paying taxes is just a cost of earning income in Canada.
Myth 9: Not Filing Makes the Taxes Go Away
If you file your tax return, you will receive a notice of assessment. The CRA has a statute of limitations where they can reassess your tax return up to 3 years after the notice of assessment is filed.
If fraud is suspected, the CRA can legally go back further than 3 years. So, as you can see, if you file your tax return, the CRA can come after you long after it is filed.
If you delay filing your return, that does not make your requirement to file go away. If the CRA does contact you to file the return, you will owe penalties and interest on any tax balances.
Refusing to pay taxes is not a wise choice to make. There are legal consequences that involve fines and even jailtime. It’s better to file your tax returns and get caught up to date.
Sometimes you will get a refund, depending if there were
taxes withheld on your income, so don’t always assume filing late means huge
penalties, but it can.There are things you can do to prepare for Canadian Tax Day here.
Conclusion
As a taxpayer, you should not have to pay more taxes than you are legally obligated to pay. As tax preparers, we are here to help you use allowable business deductions and personal deductions along with tax credits so that you don’t have to pay anymore than you are legally obligated to.
Trying to push beyond that will get you into hot water. It can cost you more in the long run to reduce taxes more than what is allowable or to avoid them all together.
If you are behind in your taxes and need to file, we can help you! We file T2 corporate tax returns, personal returns, GST remittances, and U.S. tax returns.
Call us today to get started.
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