More Money Podcast - 233 What to Know About Filing this 2020 Tax Season - Gerry Vittoratos, UFile Tax Specialist

Episode Date: March 19, 2020

Gerry Vittoratos has been working for Thomson Reuters for over 10 years as a trainer and tax support resource person. In his capacity as head trainer, Gerry has been providing training sessions to tax professionals all over Canada. He has also made several radio and TV appearances on BNN and Global TV as the UFile tax specialist discussing a multitude of tax topics. Here are some of the things we talked about in this episode. Tax Brackets, Average Tax Rate & Marginal Tax Rate. We talked at length about tax brackets and how in Canada we have a progressive tax system. That means that you pay different tax rates on different portions of your income. Your average tax rate is the amount of tax you pay divided by your income. Average Tax Rate = Total Tax / Total Income Your marginal tax rate is the amount of tax you would pay on your next dollar of income. With that said, your average tax rate is what you need to know because it will show you how much money you have to pay the government in taxes. To help, check out UFile’s Income Tax Calculator. Refundable & Non-Refundable Tax Credits: both are still good, but ultimately refundable tax credits are the best kind because you can a tax refund if you use it. For non-refundable tax credits, they only decrease the amount of tax you owe. If you owe $300 in taxes and your non-refundable tax credit is for $500, you won’t get $200 refunded to you. Your taxes owed would simply become $0. For more information, check out the CRA’s page on non-refundable and refundable tax credits. There are a ton of tax credits you can take advantage of, and when you use a tax software like UFile, it will help you find out which ones you qualify for. If your investments are in a TFSA and/or RRSP, then you don’t have to pay any taxes on any investment income you earn from interest, dividends or capital gains. But, if your investments are in a taxable (unregistered) account, then you will have to pay taxes. For any interest you earn (GICs, savings accounts, bonds…), those amounts are taxed at your marginal tax rate. For any Canadian dividends you earn, you may be eligible for the Canadian dividend tax credit which will lower your tax rate on that income. For any capital gains you earn (the profit you earn when you sell stocks or equity mutual funds or ETFs), only 50% of those capital gains are taxable. That means you get to keep 50% of that profit and not pay tax on it, and the remainder is taxed at your marginal tax rate. For full episode show notes visit https://jessicamoorhouse.com/233 Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello, hello, hello, and welcome back to the Momentum Podcast. This is your bonus episode for the week. Yay! Because even though there's some craziness going on in the world, yeah, it's still crazy. It's probably going to be crazy for a while, yet there's still important things that we need to do in our lives, like taxes. We've got to file our taxes no matter what. There's no word as of this recording anyway that there is going to be a delay or anything with the tax deadline. So just take this time to prepare your taxes and file your taxes wherever you want to file your taxes. But if you do want to use the online tax software you file, make sure to use promo code MoMoney to get 15% off. So for this episode, I am talking to a repeat guest, Jerry Vitorados. He was on my show

literally the first year I had my show. He's episode 44 in April 2016, which is crazy. So if you want to check that out and see what we talked about in that episode. Just go to jessicamorehouse.com slash 44 to check it out. But for this episode, we are going to dive into a ton of different topics, including tax brackets, tax deductions, tax credits, and just a bunch of other stuff that I don't think I've ever really talked to anyone on the show about when it comes to taxes. So you're going to get your tax fill right here, and you're going to love it. Just before I get to start, though, just in case you never listened to that original episode with Jerry, he has been working for Thomson Reuters for over 10 years

as a trainer and tax support resource person. And in his capacity as a head trainer, Jerry has been providing training sessions to tax professionals all over Canada. So he really knows his stuff. And he's also made several radio and TV appearances on BNN and global TV as the Ufile tax specialist discussing a multitude of tax topics. And Jerry has also served as the main resource person for the tax support department at Thomson Reuters, resolving complex tax issues and questions for tax professionals using the DT Professional Suite. And Jerry obtained his graduate diploma in taxation from Sherbrooke University in 2018 and is in the process of obtaining a master's of taxation. And you can understand why he's done so much education and he does so many different things listening to

this episode because he is very passionate about taxes, which is why I love having him on the show. So you're going to love this episode. So let's get to it. Welcome back to the show, Jerry. I am so excited to have you back on. Did you know that you were first on the show? Because you were on the show before, but I didn't realize it was really in the early days. You were episode 44, April 2016. I'm over like, I'm over 200 episodes now. Wow. I am honored. I'm honored I was in your first 100.

I mean, that's great. Every first 50. First 50, actually. That's awesome. I know the first 50. So that was, yeah, that was actually, I think I called the first year, the first 52 episodes was season one. So you were in season one, I believe.

Wow. That's great. I know that was, that's wild. That seems like a lifetime ago. And I'm excited to have you back on because even though there's some craziness going on in the world, a lot of panic, a lot of stuff happening, we need to still get back to reality. And I think it's important actually to not just focus about what's going on in the world and just focus on other things.

That's how I stay calm. And one thing we need to focus on is, well, it's still tax season. We need to do our taxes because if there's, you know, two things that we, you know, that are ultimate things we always have to do taxes is one of those things. Yeah, absolutely. Well, just remember taxes doesn't wait for anybody. I mean, just remember that even when you die, you still have to pay taxes on your, what they call the final return. So, so even when you die, you still have to pay taxes on your, what they call the final return. So, so even when you die, you got to pay taxes, right? So it doesn't matter. Taxes is one of these special things that, you know, it does not stop for anybody.

We still have to pay. Exactly. And before I hit the record button, you mentioned, you know, we don't know what's going to happen. We're recording this on March 15th. Things seem to be changing daily. So that's why I'm saying the day because I mean, I've done a couple of recordings. I'm like, oh my gosh, so much has changed since that recording. But we may or may not see maybe a delay in terms of like the tax deadline. There's

nothing announced yet, but who knows? Yeah, absolutely. I mean, whenever you have these kind of events, I think the last time the government had delayed was when they had some sort of technical glitch, I remember, years back, maybe about 10 years back, if my memory serves me. And they did delay for like a couple of weeks, but if there is delay, it won't be a long one, that's for sure. So I would still recommend to everybody, you know, follow your returns as soon as you can, you know? Exactly. And I'd say to you, especially since everyone's talking about the importance of self-isolation, I mean, I have definitely been taking that seriously. I mean, it's a bit easier for me because I already work at home, but I am not going outside necessarily.

I live in the city of Toronto. There's so many people here. So I just want to be careful. And I guess I am just like maybe reading too much news. But when you're at home and you're kind of stuck at home, well, here's a great opportunity to sit down and get all of your tax stuff ready and then use an online tax software like you file because you could do it at home on your computer and just get it done. Yeah, absolutely. Well, now, yeah, I mean, you said it best. Now's the time.

I mean, we're all marooned here, right? I mean, at our homes right now. So, I mean, if there is a time to do it, it's now. You've got all the time now to do it. There's really no excuse. There's really no excuse to that point. Yeah. Just get it over with. So it's one less thing off your plate and you can kind of move on to some other fun things like just binging on Netflix. Yeah, exactly. Exactly. Yeah. Okay. So let's talk about taxes. I want to kind of start off because I actually get like a lot of questions throughout the year about taxes. And sometimes they're kind of simple questions that people may just not have the right information about. So

one thing I want to talk about is just something kind of fairly foundational, which is tax brackets. I feel like people hear that term a lot. They may not quite understand how they work. And there is a difference between an average tax rate and a marginal tax rate. Do you want to kind of explain how does that all work? Yeah, sure. So for tax brackets, the way it works is that we've got basically five brackets here in Canada with different tax rate, right? Depending on the income that you've gained. I think the myth that a lot of people have about tax brackets is that, well, if I make, let's say the income that's within the second bracket, well, I pay the tax rate for my full income within that tax brackets. For example, the tax bracket right now, that's at the second tax bracket, we're at about 20 and a

half percent. Okay. And that's for income for 2019, that would be for a taxable income that is between 47 and 95,000. Okay. So a lot of people think, oh, well, if I make between that income, I have to pay 20 and a half percent tax rate on that income, on that taxable income. And the answer is not that. The way the tax brackets work is that it's basically, you have to picture your income, the income that you received as chunks. Okay. So first $47,000, you'll be charged 15% on that income. Then your next almost $45,000, $47,000, or a little bit less than that, you'll be charged 20% between $47,000 and $95,000. So assume for a second that I made exactly 95,000 of income. So the way the bracket

works is that on my first 47,000 that I've gained, I will pay 15% on that 47,000. Then between 47,95 on that chunk of my income, I will pay 20.5%. So it's not just a straightforward, oh, you're in the second bracket, you pay 20.5%. It doesn't work that way. And it's actually fair this way when you think about it. Because imagine now, imagine you were right at the threshold. Imagine you made 48,000. And now all of a sudden on your 48,000, you had to pay 20 and a half instead of 15 percent, which is the first bracket. That would not be fair. That would not be equitable at all. So that's how the tax brackets work is that you're going to cut up, basically picture it as cutting up your income into chunks. And then the first chunk of your income, which would be $47,000, you're going to pay 15% on that.

Then take your second chunk, which would be between $47,000 and $95,000, and you're going to pay $20,500 and then so on and so forth. Then you just keep going up the ladder. You keep going up the ladder at that point. So essentially then your overall tax payable would be, what was your 15% on your $47,000 plus what is the tax you're paying between $47,000 and $95,000? Add the two amounts up, that becomes your tax owing essentially on the federal. And it works the same way on the provincial side. So provincially, regardless of the province that you're in, you're going to have the same concept. So the rates will be less than on the federal side, but it will be exactly the same concepts.

So that's essentially how – and this is what we call progressive tax rate. You'll hear that term a lot used by financial advisors or within the financial media, progressive tax rate, meaning the more income you make, the more it'll get taxed. But again, only that chunk of income will get taxed more, not the first chunk. I think it's so important to know because I've even had conversations where people think that I don't want to earn more than this amount because I'm going to pay way too much in tax. I'm like, well, yeah, you will technically be paying more in tax, but it will not basically eliminate that extra income. I think some people kind of get this idea

that if they make a certain amount, then, well, all that extra income is actually going to go to taxes. So I shouldn't even try to earn that more. I'm like, it's always better to earn more money. Yeah. No, no. That's the rule of thumb. If you can make more money, do it. You know what I mean? Yeah. Yeah. You're not going to lose it all from taxes. It's still going to be worth it. You're not going to lose that money in taxes. You know what I mean? Yeah. What you're going to pay more is essentially on that, on that amount that goes over the threshold. Right. So, so let's take my example. Let's say you have a job right now, you have 45, and your employer offers you 5,000 more, let's say.

So now you've just jumped to the second bracket because you've crossed over 47,000. But remember, the 20.5%, you're only paying on about $2,000 of that income. Between 45 and 47, you're still going to pay the same tax rate you paid before the raise. So that's essentially what people need to understand. And yes, I mean, take the money,

please. I mean, if you're going to make more, that should not be an excuse. And even if you do pay a lot more taxes, figure out ways to reduce that tax burden, right? That's your better option. Figure it out there, then instead of saying, okay, I'm not going to take the money, you know, I mean, it's, it just doesn't make sense at all. Exactly. So just kind of to reiterate, your average tax rate is the percentage of taxes owed. Your marginal tax rate is kind of those tax brackets. Kind of. It's not exactly like that. Cause remember you also have credits as well, right? I mean, it is the marginal tax rate also includes some of the credits that you'd be entitled to as well. But essentially, average tax rate is the most straightforward computation

of what it is. Essentially, it's your taxable income. It's your tax divided by your taxable income, okay, by your total income, right? That's your average tax rate. So that's essentially the actual tax you've paid on the income that you've earned, okay? And it's not even taxable income. It's essentially the actual tax you've paid on the income that you've earned. Okay.

And it's not even taxable income. It's really total income because, you know, you have to base it on what did you really earn? And then, and then your deductions afterwards will, will take care of, you know, we'll, we'll, we'll change that rate. Marginal tax rate is yes, the tax brackets, the related, it's related to tax brackets, but essentially it is if I make an extra dollar. So take that example,

that person who made 5,000 more. If I make that extra dollar beyond what I made last year, what would that extra dollar be charged? And you're right. At that point, this is where the brackets come in. So for example, if I made 40,000 and I made 45 and now I'm making 45, well, my marginal tax rate will not be much different than my average tax rate, okay? Because that extra dollar will not get charged extra tax. But take the person who's made 45 and now jumps to 50, now you'll see the marginal tax rate really jump. Because on that extra 5,000, 2,000 of that, or around about 2,000, 2,500 of that will get charged a higher tax rate. So therefore, that marginal rate goes up quite a bit compared to the average tax rate.

So the marginal tax rate, essentially, the question that it answers is, if I decide to take that promotion, to take that raise, what would the extra dollar that I make be charged? While the average tax rate is basically the tax that I'm paying. Essentially, what am I paying on the income that I currently have? And that's essentially what the average tax rate is basically the tax that I'm paying. Essentially, what am I paying on the income that I currently have? And that's essentially what the average tax rate is. There you go. There you go. I always kind of say, if you want to really go down the rabbit hole, this is something I do as a self-employed person, because I'm always trying to figure out what is my average tax rate throughout the year, so I know I'm saving enough, is find kind of an income tax calculator, punch in some numbers and kind of

see, just punch in different numbers to see kind of the different changes in average tax rate and marginal tax rate. And I think you kind of can get a better sense when you have that visual, if you want to play around with it, like a nerd like me. Yeah. And there's a lot of average tax rates and marginal tax rate calculators that are there. You know, I mean, just Google it, literally. Just Google it, say, you know, Canada average tax rate or Canada marginal tax rate. At that point, you get a multitude of calculators that are pretty accurate, actually. They're pretty spot on. They can, of course, be accurate to a couple of dollars, right?

Because of the fact that, you know, the calculator doesn't know what kind of credits you're entitled to, right? Or deductions that you're entitled to. But they give you a really good picture. Like you said, they give you a really good picture of, you know, if you decide to take that extra money or let's say you decide to move to another province, what would be, and you make that extra money, what would be the difference, you know, in that, what, what, what extra tax would you pay? Yeah, exactly. Now you mentioned, uh, tax deductions, tax credits. Let's kind of talk a little bit about those. Um, I want to talk about, tax credits. Let's kind of talk a little bit about

those. I want to talk about tax credits first because another question I get is a lot of people confused about the difference between a refundable and non-refundable tax credit. Do you want to kind of explain what is the difference? Okay. So the difference is in the name. Okay. The name actually gives you the clue as to what the difference between a non-refundable and a refundable tax credit is. Let's start with a simple one, which is a refundable one. So a refundable credit, the name says it all is that if your credits go beyond your tax owing, then you get refunded the difference. Okay. By the government. Okay. So let's take it, let's take a very, you know, really simple example. So you have, for example, $1,000 of federal tax owing, let's say. And now your combined refundable credits come out to $1,200 or $1,200.

So when you take $1,000 minus $1,200, well, you have a negative $200. That negative is refunded to you by the government. And that's essentially what a refund on your tax return is, is that you take your net federal tax minus your refundable credits. And then if it comes out negative, you have a refund. If it comes out positive, you have an amount owing. That's the last step of your tax return. So refundable again means if my credits outweigh or are above my tax owing, I am refunded the difference. And that's why they're called refundable tax credits.

Okay. So, so tip the most typical refundable tax credit you'll see on your tax turn is your payroll tax. That's the typical one. Okay. So whatever you get withheld as a payroll tax on at source on your employment income, that becomes a refundable tax, okay, a refundable tax credit, sorry. So that's essentially what that is. Now non refundable tax

credits. Now the name says it all, if they are non refundable, which means that I take the same example again, but this time, this time, my $1,200 are nonfundable. So I've got federal tax only of a thousand. I've got non-refundable credits of a thousand, 200. Okay. Then the difference, unfortunately will not be refunded to me. Okay. So what the credits will do is that they'll nullify my federal tax. So I've got zero tax to pay, but that extra $200, unfortunately just, you know, disappears. Goes away. You don't get it as a refund. Yeah, that sucks. Exactly.

Exactly. And that's why, you know, that's why whenever you see like, you know, the government does a lot of advertising, you know, about, oh, look at these credits. Look at that credit that I do. I mean, they're great. Don't get me wrong. Anything that could reduce your tax is great. But remember that the majority of these are non-refundable.

Okay. And they don't cost the government as much. Okay. Because they know that all they're going to do is simply wipe out your tax, but they won't owe you anything on the difference. Okay. So, so that's essentially what, what the difference between the refundable and non-refundable. Now non-refundable, there are a bunch. I mean, it's just, you know, that this is where the government, this is what I say, what I say, every government tries to win elections, okay elections through non-refundable tax credits. And you'll notice them ramp up the credits just before election years. You'll always notice that.

So there's every type. Of course, you have your typical ones like donations, medical expenses. Then any contributions you make to your CPP, any contributions you make to EI. These are non-refundable credits that are used to reduce your federal tax. So that's essentially the major crux. That's the difference between the two. Yeah, exactly. That's great.

Since you kind of mentioned a few, do you want to kind of share some other tax credits that maybe people, they can either be refundable or non-refundable that people may not be aware of? Like, I feel like as I've been doing my taxes for a while, I kind of know most of them. But I always feel like, like you said, sometimes there's some new ones that maybe people forgot about. Yeah, I mean, there's quite a few. I mean, I know that, for example, you've got your typical ones, which are your tuition, education, and textbook amounts. So your tuition amount is one. The big ones are medical and donations, especially medical, because who doesn't have medical expenses these days?

Who doesn't have a prescription that they take from the pharmacy? And usually the tip that I give as far as, for example, medical medical is that there's a lot of type of expenses that are eligible as medical expenses. Okay. There's, there's, you know, if you go to the CRA website, just type in medical expenses, they have a whole list of things. Okay. And, and one that is often ignored a lot of times are specialists. Okay. So for example, you go to a site, you go to a psychologist, okay. Uh, you go to a naturopath, you go to, uh, uh, you know, and so on. There's a, there's a bunch of them on the list, a chiropractor, for example, you know, etc, etc. You know, all these specialists, any visits you do with these

specialists are eligible as a medical expense. Okay, so these are the ones and, you know, I think the theme that I said in the first podcast that I'd done with you was to get organized. I remember I really pushed that in the first podcast. And I say it again, because you'd be amazed how many people lose out on these expenses because they just don't have the receipts. They just forget them or they don't think at that moment when the practitioner is giving you the receipt to archive it, grab that and put it aside. Because most people get their tax receipts around you know, around what, February, right? February, March is when they get them. But your medical receipts, you get them

throughout the year. It's not one specific time that you'll get your medical receipts. So that's why I repeat to people, you know, when in doubt, if you think it's eligible, put it aside, okay? Put it aside right away as much as you can. From there, beyond that, there's not – again, you have your typical ones. The other ones are very strict rules essentially. I mean we all have our basic personal amount, which basically means the government simply gives you $12,000 at a 15% clip as a basic credit. They give it to all of us with a few exceptions, with a few exceptions for those who are seniors who are born in 1954 or earlier. They also have the age amount, which can be quite interesting. They get basically about 15% of $7,400. Okay. Which is just purely

because they're of a certain age. Okay. That's that's an interesting one as well. Beyond that, there's some big ones that are rare, but that can help out quite a bit. One is adoption expenses. You go and do the whole, because adoption can be very expensive. It's not exactly a cheap endeavor to adopt a child. The government gives a non-refundable tax credit for that as well. One of the newer ones that came in that is interesting, coming back to seniors,

is essentially what we call the home accessibility expenses. So any work that has been done, any renovations that have been done to the home to make it more accessible, for example, ramps in the bathroom, a wheelchair ramp outside the house, et cetera, these are now specifically, ramps in the bathroom, a wheelchair ramp outside the house, etc. These are now specifically, you can claim them as a credit,

as a non-refundable tax credit on your tax return. So that's another example as well. So these are typical ones. And then beyond that, then it really becomes minutiae. What type of income do you have? And if you're really, again, a lot of these credits are very specific. They're targeted to a very specific audience. So that would be on the non-refundable side. On the refundable side, you have an interesting one, which is what they now call the Canada Workers' Benefit, what used to be called the working income tax benefit.

So that one essentially is for people who are just getting started in the job market, essentially to encourage them to stay in the job market by getting a refundable credit, in this case, if they gain a certain amount of income. So somebody who's young or somebody, for example, who was on welfare originally and now is getting into the job market. Okay. What the government does is simply top up, top up your credits, you know, to encourage you to stay and to continue in the job market. Okay. So it's not unlike what we saw that, you know, the experiment in Ontario, when it came to the minimum income, it's very similar concept. This

will be more of what economists would call a negative income tax, essentially. And the purpose of it is that, well, if you're just getting started, if you're making about five to 10 grand, let's not kid ourselves, it's not a lot of money to live on. And you're losing other benefits in the meantime. So the Canada workers benefit comes in to, stem the loss of the other benefits you were collecting before you got back into the job market. So that one's an interesting one. That's a great one that's been there for years, and the government actually increased it this year for 2019. So that's a great one. And then beyond that, I think the last one that I could think of off the top of my head is the school supply one for teachers.

So if you're a teacher and you have school supplies that you paid out of pocket, now you can claim these as a refundable credit on your return. And that's interesting because you're refunded directly, essentially, a portion of those expenses. So that's a nice one as well. Yeah, and I know teachers do that all the time. You're refunded directly, essentially, a portion of those expenses. So that's a nice one as well. Yeah, and I know teachers do that all the time. So that's great that there's that tax credit. So I guess those are awesome, but it's important for everyone just to look at the CRA's website just to see what's kind of new. But if someone was to use an online tax software like Ufile, would suggestions come like, would they be guided so they don't miss something? Yes. I mean, we would have, uh, we have an option within our program, which we call tax savings ideas. And then based on the, uh, based on your profile,

based on what you've inputted in the software, the software will give you suggestions on some of these credits that I just mentioned now. Uh, you know, so it'll give you some suggestions saying, Hey, you know, we noticed this, maybe you were, you're entitled to this credit, you know, so it'll give you some suggestions saying, Hey, you know, we noticed this. Maybe you were, you're entitled to this credit, you know, maybe you're entitled to this deduction, you know? So that's, uh, so that's part of the, of the software, what it does. It's got a little, it's got like an artificial intelligence that looks at your profile and says, okay, well, you know what? I see that you claim this expense.

Maybe you could claim this as well. Why don't you check your receipts and see if you can do that? That's awesome. Well, that's part of the reason to not try to do it manually. I'd say. Oh, no, no, no. I mean, pen and paper is long gone. I mean, no, no, forget about that.

I tip my hat to people who still do it. But to me, you're missing out on a lot of things if you do it by pen and paper, not the least of which are transfers between a couple, for example. I mean, these alone can save you quite a bit of money. You can get quite a bit of tax savings by simply transferring certain amounts like your medical expenses or your donations to your spouse. And that's hard to do with pen and paper.

You could leave, like Ufile has an artificial intelligence in there that basically does these transfers automatically. So no, no, no. By all means, please use software. I'm not just doing this. I'm not just doing this to plug our product. I'm doing this to save you money. Yeah. Save you money and time and a marriage possibly. Absolutely. Absolutely. So on the kind of same lines, I want to talk a little bit about investing because

I think a lot of people aren't too maybe worried about taxes and their investments because they're like, oh no, I've got everything in my RRSP or my TFSA. And so I don't really have to worry about that. But there's also lots of people out there that have investments in a taxable account and may not actually understand that they have to pay tax on the interest or the capital gains or the dividends they earn. Do you want to kind of talk about what can they expect when they are having to pay taxes on those? Okay, so just remember that a lot of people, for example, have taxable accounts also have what we call drips, right?

So basically, in other words, you're repurchasing the same stock through dividends. So with drips, for example, you don't actually get to see the cash, right? There's no cash in your account. It's just simply reinvest and buys more shares. Well, with a drip though, that's considered income on your return, okay? Especially from a taxable account. So you have to be mindful of this. Any dividends or any interest that the account generates, even if you reinvest it right away, even if you don't actually cash that amount in, becomes income on your

return. Now, that might sound like bad news, but there is some good news here. The first one being, I mean, first of all, who gets interest income at this point? Let's get that out of the way. Okay. I mean, what are the interest rates now? We're about to hit negative territory at this point, right? We're going to be paying the government to hold money for us, you know, or the banks to hold money for us, which I think with a lot of countries, it's already the case, right? But with dividends, what's interesting is that remember that dividends have a preferential tax rate, okay? The government is incentivizing you to invest in Canadian dividend paying stocks, okay? That's essentially what they're doing. So even if you have a taxable account and you're saying, oh, wow, I have to declare these dividends as income

every single year. Remember that they don't get taxed the same as interest income, for example, or your employment income or your business income. They don't get taxed the same. They actually get a preferential tax rate because they're eligible for, and here's another non-refundable tax credit, the dividend tax credit, essentially. So the government is incentivizing you to buy dividend-paying stocks. So the tax system and the way the tax code has been written in Canada is to essentially incentivize you to invest in these companies. By number one, like I mentioned, you're getting the dividend tax credit. So that's a really big one, because that really reduces your bill by quite a bit. And essentially meaning that income doesn't get

taxed the same interest, unfortunately gets taxed exactly like employment income or business income. Okay. It's just, it's just income that's there and it's submitted to through the tax brackets. And there's no real tax break when it comes to interest income, unlike dividend income. Now, now the kicker, or let's say the cherry on top when it comes to taxable investments, and again, unfortunately they're taxable, but it doesn't matter. They're still incentivized is on the capital gain side as well. Okay. So let's assume now you sell one of these investments at a profit. Okay. Well, that profit becomes income now on your return, just the profit, right? So, you know, I had a stock at 5,000.

You know, I sold it. I sold it for, actually, my cost was 2,000. I sold it for five. My profit is three. Now, from that profit, you split that profit in half and half it goes straight to your pocket. It doesn't get taxed. This is what the government calls the 50% inclusion rate, which means that from whatever profit you make on these stocks or mutual funds, let's say, or ETFs, whatever you buy,

only half of it gets included in your income. The other half you get to pocket. It's literally in your pocket. The government simply says, you know what? It's tax-free. You keep it. And you're only going to be taxed on the $1,500 extra. Okay. On that $1,500 instead of the 3000 profit that you actually made. So on the one side, I'm getting a preferential tax rate for the dividends. On the

other side, I get to keep half the profits that I make on those accounts and pocket them directly. Okay. So, so, you know, on the, on the taxable account, it's again, even though, um, even though, you know, you're still better off putting it in an RRSP or TFSA because you know, the, what I just mentioned now, interest dividends and capital gains are sheltered. Okay. In those, in those accounts, they never get touched. They never get, they don't get taxed until for example, within RRSP, you pull it out. It's still worth putting something in your taxable account. If you've maxed out, you know, your, your, your tax preferred accounts, it's still worth it because you're getting a preferential tax treatment on that income. Okay. Now there's another thing you could do as well, considering that the interest rates are so low right now.

Okay. I mean, the bank of Canada, what cut the rate right now? We're dated to what's called we're in the mid March right now, 2020. The Bank of Canada has just dropped the rates again. Remember that now you're in, remember that for a taxable account, an investment loan is tax deductible. So, so for example, let's say you borrow money to buy shares or your mutual fund in a taxable account. Well, as long as what you buy creates income, in other words, interest or dividends, the interest that you pay on your investment loan becomes tax deductible. You get deducted off your net income and taxable income like you can an RRSP contribution.

It's the same thing. Okay. So, and right now the interest rates are so low right now. I mean, if you were, if you ever, like, I know, don't get me wrong. I'm not, I'm not proposing that people, you know, on a personal finance side of things, I'm not proposing that people borrow to invest because it is risky. Yeah. Borrow to invest. Only do that if you know the risks you're taking. You know, I think don't go crazy. I've been getting so many questions. People ask me, oh, what should I buy? What should I buy?

I'm like, you need to relax and have a plan and know what you're getting yourself into. And don't go crazy if you've never started investing and start borrowing to invest. Don't do that. Not a good idea. Yeah, exactly. Yeah.

Do not do that unless you know the risk. Exactly. That is the perfect advice. But if you were to do it, if you were to do it, now's a really good time in the sense of the, because the loan, the, you know, the loan rates are so low right now. I mean, it's unseen. It's never been seen before how low these rates are. And remember that for a taxable account, that interest that you're paying becomes deductible. So it can be quite advantageous. So again, even though it's taxable, the account is taxable, you're like, oh, that's not great. You still get some breaks. You still get some breaks by having a taxable account if you've maxed out your tax-preferred accounts.

Awesome. I want to talk a little about the CRA My Account. Now, I'm probably in there more than most people just because I'm also self-employed. And so I have to check it for my business and my personal amounts for what are my contribution rooms and all that kind of stuff. So I'm in there quite a bit. Lots of people probably don't pop in there unless it is tax season. And I know there's a few updates. There's a new section called on uncast checks that people have been talking about. Do you want to kind of explain what that is that people can expect once they log in? Yeah. Well, first of all, I'm just surprised that there should be a section there called uncast checks. I mean, that is just beyond me, you know? I mean, I unfortunately do not have any. I checked it. I was very disappointed.

Well, that's not unfortunate. That's fortunate. That means you actually took your money, the money that was owed to you, right? I mean, I find it so surprising to have a section like that, but let's get into it. I mean, essentially, uncashed checks, meaning that if the government owes you money, essentially, you have not cashed the check from a previous assessment that you have. Well, now it'll list it for you in my account. And my account is basically the government portal that explains everything about your tax file with the CRA. So everything is there with my account. I can't recommend it enough.

It is a great, great service that is offered by the CRA that essentially explains to you a lot of things, not just your past notice of assessments, but also what are you allowed to contribute to your RRSP. And it's the only place where you could see directly what you're allowed in your TFSA. It's really the only place you can go. No, I have a question with that just because I've had some people ask me or they got some information somewhere that says, well, I heard that even when you log in, the amounts that it shows for your RRSP contributions or like how much available room you have for your RRSP and your TFSA may not be 100% accurate. Is that true? It's a timing thing. Okay. That's essentially what it means. Remember that the limits that the government is giving you for your RRSP and TFSA is a snapshot as of that moment. So the government doesn't know until you file your return what you've contributed during the year.

So you might have $10,000 worth of room in your RRSP or your TFSA, but they don't know that you've made contributions along the way. So they don't know that offhand until you file a return. Now for the TFSA, you'll only find out at the, at the beginning of next year. Okay. Because it's your bank that sends the transactions to the CRA and then the CRA updates your file. But yes, it's true, but it's, it's not that it's not accurate. It's just that it's, it's not timely. That's really what, what it is. They don't know what you've done in the meantime when they took that snapshot of your file. So you still have to be mindful when you're making these contributions that you're not going over those limits. You have to be really, really mindful of that. Yeah. So it's important to, if you really want to keep

an eye on that, to track the contributions that you make or just make sure that you're, whatever, however you're investing, you can pop just make sure that you're whatever, however you're investing, you can pop into those accounts and see, okay, add up all your transactions and then do the math and see like, oh, okay, so you don't accidentally go over because there's nothing worse than accidentally

going over your contribution room because you thought you were within your limit and you weren't. Yeah, exactly. Because the penalties are stiff, actually. If you go over those limits, whether it's TFSA and RRSP, it's 1% per month on the amount that you're over.

And that's what they charge you as an extra penalty. It's not even a tax. It's a penalty that they charge you. So you have to be very, very careful, be very mindful. And that's where My Account really comes in. My Account really is a great tool to do this because you can see at any time,

you go to your browser, you simply log in, and you can see at any time what your limits are and also what your assessments are. And, of course, your uncast checks, which, again, I'm still wrapping my head around it, that people actually have uncast. And I think it was quite a few million, right, that they had announced. I mean, it was a staggering amount that I saw in the news. And it just doesn't make sense to me. Maybe people lost the news. And it just doesn't make sense to me, but maybe people

lost the checks, you know, they had it at home and they lost it and now they can finally cash it in. Yeah. I mean, well, you know, I mean, why, again, I'm, I'm still understanding this because I'm, you know, for me, it's like, if somebody owes you money, because think of it this way to me, this is what I tell people. Cause when I was a preparer as well, I would have people who were really late filing the returns because like, ah, I've got a refund. So that's fine. Well, I will tell you this way. Would you be that patient with somebody who you, who owed money to you? Let's say you, you lent money to somebody, right? Would you be that patient? Would you wait two, three, four years before you would try to get your money back? Or would you actually be a lot more,

you know, on the ball and try to get your money back? You know, I mean, it's, it's the same thing. The government is like that other, you know, like that's like that sponge cousin that you know, on the ball and try to get your money back. You know, I mean, it's, it's the same thing. The government is like that other, you know, like that's like that sponge cousin that you have, you know, that doesn't want to pay you back. Right. I mean, that, that's how you got to view the CRA. That's how you got to view the government if you haven't cashed in your check. So yeah, I mean, like you said, it's, it's a new section. It's great. You simply click on it. I tried it today, actually myself, I was curious and I went in there. Thankfully I don't have any uncashed checks on my own. So, so I'm not just talking'm not just talking and being hypocritical here. So you click on it and simply mentions it to you. It's just one click and it just tells you essentially whether the

government owes you money. Perfect. Okay. So before I let you go, I just want to kind of talk to anyone who's listening who is self-employed or maybe they have a side hustle. There's a lot of things that I feel like people don't know about self-employment. Having done the side hustle thing and now I've been self-employed for three years full-time, I feel like I know more than the average person because I'm very organized and I actually enjoy accounting. But I think there's a lot of people that don't quite understand how things work. Let's just talk more about if you were to go from being an employee to becoming self-employed, what are some extra things that you need to do to make sure you are

properly prepared? Because no longer do you have an employer to automatically kind of take that tax money and give it to the government on your behalf. Yeah. So, I mean, the first thing I think you just said it now is to get organized. I mean, that's really the first step. Okay. Because now when you have a business, you have to start tracking your expenses. Um, I would recommend strongly, uh, it's worth the investment to invest in a, in a really good accounting software. Okay. It's, it's, it's worth the investment. It will save you hours of time, hours, exactly hours of time. And also it'll actually get you money, right? Because you're going to, you're going to be able to track your expenses properly, not miss out on expenses you were entitled to.

And believe me, you don't want to go back and do adjustments on expenses you missed. Okay. You don't want to do that with a CRA. Okay. Because afterward it just becomes very complicated and then they really audit you fully. Okay. To figure out what's going on essentially. To be honest with you, you know, I would say right now what's great about becoming, you know, having a side gig, for example, or becoming self-employed

is that it's never been easier to do. Okay. For the simple reason of technology. Okay. It's just, it's not, I mean, literally you just download an Uber account, right? You can just download the Uber app and you could be driving tomorrow. I mean, it's, you know, or that, that, that moment, actually, you're, you'd be allowed to drive and start making some, some side money. It's never been easier. And I would recommend strongly, if you have a passion, if you have something that you're good at, uh, that you could do on the side that can make you money, if you have some time to spare, uh, you know, now's the, you know, there's never been a greater time to do it. Um, at that point. So, and again, this is where the accounting software comes in.

I recommend it strongly, just purely for the paper. A lot of these accounting packages. Now they can archive your, uh, they can archive your expenses by simply, you know, snapping a picture and converting to PDF. Uh, and some of them can actually even read the receipts and, and, uh, and auto complete, uh, your state, your financial statements. Right. Uh, so, so this is where I would say, you know, invest in that

beyond the tax side of things, invest in that. The other thing I would say is when it comes to, for example, vehicle expenses, you have to keep a log, especially in your first year. Okay. So, so what the government tells you, and again, you use software for this, by the way, there's software that can actually track your business kilometers, right? So what the government tells you is when you're first starting off your business, you have to keep a very detailed logbook of all your mileage, of all your business mileage in the first year, okay? So you have to do this. And then usually even you go beyond the second year, you could just do about three or four months, okay, at that point. But in the first year, I would keep a really detailed logbook in case the CRA

audits you. And then every other year after that that what they require you to do is to keep at least three months like one quarter of the year to keep a detailed logbook because remember that your your vehicle expenses will be prorated uh based on uh your business mileage okay based on the mileage you've done so let's say a third of your mileage uh with your car is done for your business. Well, then a third of the expenses of the vehicle will be deductible off of your business income. Okay, that it's just a very simple formula for the government on that end. But you have to keep a very detailed logbook. I would recommend even though the government tells you, you know what, you could just keep one quarter.

I would recommend just keep a detailed logbook year in, year out. I mean, that, that would be my advice because if you get audited, you know, that they can really start asking you questions on that quarter year that you, that you chose to, uh, to, to, to log. So I would just, and again, with software now with technology, it's so easily done. It could just do it for you. There's really no sense in the, with GPS location too. Uh, there's really no sense in, in, in, uh, in doing anything else. Beyond that, I would say somebody who's starting off their business, usually the most common expenses they will have will be the business use of home. But there are some, I do have to specify things. A lot of people think, you know what, I've got my little desk in my bedroom and I'll just go there and I'll call

my bedroom as my home office. That doesn't work. Okay. That, that does not pass mustard, uh, with the CRA, uh, for the simple reason that, uh, what the, what the, what the tax code tells us is that whatever space you have for your home, uh, for your home dedicated to your business, it has to be dedicated to the business. Okay. So, so you're not using that room for anything else with that area apart from what you do for your business. Okay. And that's an important, uh, that's an important thing I wanted to mention because a lot of people think, like I said, I gave the example, Hey, I just stick a table in my bedroom and I'm good to go. No, it doesn't work that way. You have to really, that room has to be dedicated to your business. So that's, that's an important one. And what you can claim is quite

a few things as far as business use of home. For example, your heating costs, your electricity, your homeowner's insurance, or renter's insurance, for example, any maintenance, property taxes, mortgage interest, if you own the home, et cetera. These are expenses you can claim off of your business income, but again, on a prorated level, meaning that if the room you've dedicated in your house for your business is about 10% of the total room of the house, then you can deduct 10% of those expenses. That's again, the prorated math that the government will use for you to claim your business use of home. And then beyond that, just remember the golden rule when it comes, and this is literally written in the tax act, the golden rule of any expense, whether you think it's deductible or not for your

business is you have to ask yourself the following question. Is the expense, is the purpose of the expense for me to gain income? Is it for that purpose? So if I bought a pen, if I bought some supplies, okay, am I using those supplies for the purposes of making more money in my business? If the answer is yes, it is essentially deductible. Okay. That's the golden rule for the government. And it's literally written in the act that that's, you act. There's an article in the tax act that literally tells you that. If the expense was incurred for the purposes of you gaining income, it's a deductible expense. And then the rest is just details, what type of expenses are eligible. Now, other things to be mindful of when it comes to business expenses is, for example, your meals and entertainment. Okay. That's, that's a big one because the government limits what you're allowed

to claim. So, you know, so if I take out my customer and try to woo them, okay, for, and then I decide, you know what, Hey, I've been meaning to go to this really expensive restaurant in my neighborhood. And you know, why not use this, right? It's deductible now, right? I mean, I'm trying to woo my customer and that's fully deductible. I'm allowed that? It's deductible now, right? I mean, I'm trying to woo my customer and that's fully deductible. I'm allowed, that is a deductible expense. But remember that the government is not stupid. And what the government will say is,

you know what? We're not going to use this as an excuse to go to the most expensive restaurant in town and deduct your meal. They'll only allow 50% of that meal to be deductible. So that's one limitation that you have to be mindful of. Okay. So there's some of them that they, that they really limit as far as that. Yeah, no, I think an important thing to remember, cause I kind of get into this mode. I'm like,

oh, it's okay. It's a business expense or it's deductible. My husband always reminds me, it's still your money that you're spending. Would you rather save that money or do you want to spend it? If you're going to spend it, spend it. But just remember, you are still spending your money. Yes. And you know what I use as a rule, right? What I explain to people is that just remember, do you think a Walmart would say, oh, you know what? I'll just put a needless expense because they think they get deducted tax-wise? They won't.

Neither would Amazon. Neither of the big conglomerates would ever do that. So just remember that the government is not in the business to save you money, to give you money in your pocket. The government is there to simply give you what you're due. And that means that it's precisely right. And I hear this all the time. I see my friends go for dinners like,

oh, it's deductible. Don't worry about it. I can do it. No, no, no. Remember, the government is not in the business to give you money. Okay? You are there to make as much money as possible. Your business is like a person.

Okay? And that person needs to make money. Okay? And at the end of the day, you have to rationalize your expenses like any other business. Like I said, Walmart wouldn't do this. Why would you? And Walmart is one of the most successful companies in the world. So why would you?

Okay. So absolutely, that's a very, very good point. And I mentioned this a lot in other interviews that I've done is that remember it's a business, it's there to make money. Okay. So you have to squeeze every last dollar you can out of that business. Yeah. You want to make a profit. That is the goal, not to spend everything and then use it as a business expense. I mean, it's good to have business expenses and stuff, but personally for, in terms of like trying to find deductions, I'd rather have more money to put towards my RRSP than to just spend a ton of money on business expenses. The goal, I feel like if you want to be like, you know, a Walmart who's very profitable is to have a lean business and only spend money on business expenses when you really need to. Exactly. That's, and that's the point.

You're no different than a Walmart. It's a business just like your thing is a business right now, right? So at the end of the day, you have to rationalize your expenses as much, even if your expense is tax preferred. It doesn't matter. It's the money that's out of your pocket. It's no longer in the business. You could have taken that money and used it somewhere else in the business.

So no, absolutely. That's what I would say. The last thing I would just mention as far as business expenses is also the expense that you're going to have depends on whether the good that you're buying is durable or not. Okay. Just remember, like, for example, we mentioned vehicles. Okay. A vehicle expense is a durable good, which means you can't simply deduct the purchase price of your vehicle. It doesn't work that way. What you do is that you depreciate.

There's the accounting term there. You depreciate the value of the vehicle as per what the government allows you to depreciate. Another example of this would be like computer equipment. Would be another example of this. So remember that computer equipment is a depreciable. Government considers it a capital asset. It's a depreciable property because it's a durable good. It'll last you for many years.

It's like a pen that you can simply throw out within a couple of months. You know, a computer will last you long. And then in that case, you can't deduct it fully. Okay. You can only deduct a percentage of the value of that computer based on the percentage that is prescribed by the CRA. And by the way, right now is a really great time to buy these type of depreciable assets on your tax return. Because of last year, what the government calls the accelerated investment incentive, well, in the first year you purchase the property now,

you could actually triple your first year depreciation rate. This is since the 20th of November 2018 when they made the economic update. As of that point, any capital asset you buy now for your business beyond that day, which would be the 20th of November 2018, you could triple your first year depreciation rate now as an expense. So that's a really nice one. And so now, you know, if you're investing in your business and you really want to get it, get it from the ground,

ground up essentially, and you were waiting on buying some of these assets, don't wait because now you're getting a much better, a much bigger expense that you can deduct off of your business income. Amazing. So now, of course, I'm kind of contradicting myself because we just told people, hey, don't spend money and everything. But if you're going to. But if you're going to, if you were thinking about it,

if you were thinking between this year and next year, well, don't wait because in this case, you're getting the tax for treatment already. You're getting it immediately. So the government added what we call the accelerated investment incentive, and they're tripling the rate. So that's a really, really big incentive there. The government is giving everybody. Definitely.

Wow. A lot of food for thought. Hopefully this has inspired people to get their stuff together and do their taxes. I wrote down a few notes. I've already kind of started compiling all my stuff. And I'm like, you know what? You mentioned home insurance. I'm not sure if I included that for, you know, possible business expense. So I wrote that down. I don't know if you have to check out for this interview. I'm like, I'm not sure, actually. I'm glad I talked to you. Because there's so many things, like you said, that could

be, you know, a business expense that you may forget about. There's so many different things. So it's important to have that in front of mind. Just remember the golden rule. Did you incur that expense to make money in your business? If the answer is yes, then it's very likely you will be able to deduct that expense. Just remember that golden rule and that should guide you. And then from there, just do a little bit more digging. You know, just go into the guide.

You know, the CRA guide for businesses is, I can mention it now, it's the T4002. Just Google that and it'll take you directly to the business guide. And that will explain a lot of what I just mentioned today in the podcast. Absolutely, absolutely. So I guess if anyone wants to get started and they want to use you, I highly recommend

that you use my special promo code that you can get 50% off. It's just promo code MoMoney. So make sure to do that. Save some money on getting your taxes done. It's always a nice little extra. But where can people find more helpful, useful information about taxis and any kind of resources you can point them to on the Ufile website?

Okay, so on the Ufile website, we write a really nice tax blog directly on our website, which is on ufile.ca. And when you go to ufile.ca, there's some tabs at the top, and there's a tab called Tips and Tools. And when you go there, there's one option there called the Ufile blog, and there we write a lot of general interest articles about taxation. We give you some additional tidbits about things. I mean, the last article that we wrote, which is a really nice and handy one, is if you're studying abroad, what are the tax consequences in Canada? Okay. Now, of course, maybe that's not considering where we're at right now and what's going on in the world. That might not be something that's prescient right now, but we also have, for example, an RSP and TFSA comparative as well. And not just your dry on RSP is deductible. TFSA is not deductible, you know, not a dry article like that, but

basically, you know, how can you maximize your savings worth? Where are certain questions you should ask yourself before you meet, you decide to invest between one and the other. Okay. And on our website as well, we also have like a tax and you section, essentially where we have certain basic questions that a lot of taxpayers always ask. And we give quick answers to those questions as well. So that's all found, you know, on our Ufile webpage, which is ufile.ca. And we also have an income tax calculator, by the way, which is what you're mentioning before as well. So, so we have a little calculator that you were looking for. We have it on the Ufile tips and tips and tools section of the Ufile website. So we have that as well. So we have a little calculator that you were looking for. We have it on the Ufile tips and tools section of the Ufile website. So we have that as well. Perfect. And I will link to those all in the show notes for this episode. So make sure to

check those out. Well, thanks so much, Jerry, for joining me again. It's been too long, so many years. I'm glad you were back in the show to share your knowledge. You just have so much. So thanks so much. Well, thank you for inviting me again. Thank you. And that was episode 233 with Jerry Federato's tax expert extraordinaire. Make sure to check out ufile.cn. If you're going to use that software, make sure to use code Mo money to get 15% off because save money, saving money is always the best thing to do. And if you haven't already, you know, take this time to get your stuff together. I also have a free tax preparation checklist in case you're like,

what forms do I need again? I made one a couple of years ago. I freshened it up for you. Go to jessicamorehouse.com slash tax prep checklist. I will also include a link in the show notes at jessicamorehouse.com slash 233 for you. You can download the PDF. You have this wonderful tax prep checklist. This is also for Americans too. So it's a tax prep checklist I made for Canadians and Americans. So it'll give you kind of all the forms that you need to get your taxes done, but just make sure to put it in your calendar and get it done. Get it done before the deadline, and then you can move on with your life and not think about taxes anymore. So I hope you really enjoyed this episode. Come back here tomorrow, Friday, for another Money Minute episode with yours truly. Until then, have a good rest of your day. I'll see you later.

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