Last month, we held a financial literacy workshop with Caroline Battista, a tax analyst with H&R Block Canada, and she covered everything from budgeting to reducing debt to income tax preparation. With the tax deadline fast approaching, she shared valuable advice on how to get organized early, debunked tax myths and outlined the paperwork needed to complete a tax return.
The response to the workshop meant there were more questions than could be answered. Caroline weighs in on some of the interesting unanswered questions:
Question: Do international students need to file a tax return?
Answer: The Canadian tax system is based on residency rather than citizenship, so there are a number of factors that determine whether you need to file a tax return. For example, if an international student leaves the country to go home for the summer, then he or she is less likely to be considered a resident and would not need to file a Canadian tax return. In the event that there is a tax treaty with your home country, your residency status will be determined by tie-breaker rules in the treaty. A breakdown of the criteria for residency status can be found here.
Your residency status does not matter if you earned income in Canada during the year. If you earned income, you need to file a tax return to report it. This could include money from a job, research grant, or teaching assistant position. If you earned income, you may be eligible to claim tuition and education credits and, if you plan to stay in Canada, you can carry these tax credits forward to use in future years when you are earning more money.
If you did not earn any income but are considered a resident, you may benefit from filing a Canadian return every year you study in Canada. Once you are older than 19, you may be eligible to receive the quarterly GST/HST tax credit, which is meant to refund some of the sales tax you pay.
Question: Can you claim moving expenses if you relocated to Canada from another country?
Answer: With a few exceptions, international students coming to Canada cannot claim moving expenses. You can only claim these expenses when relocating within Canada if you have employment income in your new location.
Question: How long can you carry forward tuition credits?
Answer: You can continue to carry forward unused amounts indefinitely, until you have enough income to use them. Since tuition and education credits are non-refundable credits, they cannot create a refund on their own; you need to have paid income tax during the year to generate a refund. Once you have carried forward your credits, you can no longer transfer them to a parent, spouse or grandparents.
You are required to claim your carry-forward tuition and education credits the first year you can use them, so you cannot choose to use a portion of your credits and save the rest for another year. That means you can only carry forward credits if you have more than you need to reduce your taxable income to zero.
Question: What is the difference between deductions and credits?
Answer: Most tax credits are non-refundable amounts, which means you must have paid income tax during the year in order to claim them. Tax credits are multiplied by 15 per cent before you can apply them to your tax owing. So, if you claim the $5,000 First Time Homebuyers Credit, you receive $750 in tax savings. As long as you have federal tax payable, non-refundable tax credits will increase your refund. Credits are of the same value to everyone so if you transfer tuition credits to your parents, they receive the same amount as you would if you save them and claim them later.
With deductions, the amount of savings fluctuates with income. Deductions are subtracted directly from your taxable income and you do not have to reduce the amount by multiplying it against a percentage. For example, if you earned $47,000 and made a $5,000 RRSP contribution, your taxable income would be reduced to $42,000.
As you earn more income, you pay more income tax. For 2014, you pay 15 per cent income tax on the first $43,953 you earn. From $43,954 to $87,907, you pay 22 per cent on that income. So a deduction can be used to drop your income to a lower bracket, as in the RRSP example above. If you earned $47,000 but your RRSP contribution dropped your income to $42,000, then you will only pay 15 per cent in income tax. And you don’t pay 22 per cent tax on the $3,047 you were over the income threshold. Moving and childcare expenses are other examples of deductions.
Since deductions usually result in bigger tax savings, the Canada Revenue Agency is more likely to ask you to provide receipts to prove your claim. If you cannot provide the proper documentation, your claim will be disallowed and your return will be reassessed without the deduction.
If you need further assistance preparing your tax return, H&R Block tax professionals are happy to answer questions for free. Or you can ask a question online at http://taxtalk.hrblock.ca/ask-us-a-question, or visit www.hrblock.ca to try H&R Block Canada’s new Tax Software. It allows you file one free return until March 31, 2014.
