Today, the letter K is for Know Your Income. Eleven letters down, 15 to go!
Okay, so I needed to stretch a bit today to find a "K" word. In the U.S., Tax Girl @taxgirl has a huge advantage for some of these tricky letters in writing her [American] Taxes A to Z for Forbes because the I.R.S. seems to love appending letters to the end of its endless list of forms and instruments.
Like 401K fund. I mean, really, how easy is it to find a "K" tax word to write about in Canada? I concede she has to come up with new letters for the many years she's been running the series. Personally, I don't know how she does it, but still.
In Canada, I can't even find an appropriate "K" word to talk about in a dictionary of accounting, far less in the Income Tax Act. But K does stand for knowledge. And as we all know, knowledge is power. In the tax context, and otherwise.
WHY KNOWING YOUR INCOME IS THE GRUNDNORM OF THE CANADIAN TAX UNIVERSE
While for those who are self-employed, "know your expenses" is also an important point, for ALL Canadians "know your income" is the fundamental principle for getting your taxes right and avoiding hassles from the CRA. In Canada's self-reporting, self-assessment system, you tell the government how much you made and how much tax you owe, rather than the government telling you.
It's easy to forget about all your sources of income. Many Canadians have several jobs in the course of a taxation year. Maybe a series of consecutive full time jobs that are seasonal. Maybe several concurrent part time jobs that equal a full time income. Perhaps a little bit of independent contractor work. Plus some interest income from investments. And a capital gain from an empty lot that you inherited years ago, and just never got around to selling until this year. All those income numbers need to be added up if you're to know your true income.
KNOW YOUR EMPLOYMENT INCOME EVEN WITHOUT A T4
You're supposed to get T4 slips from employers telling you how much you made, and what kind of deductions (like taxes paid in advance) that they took off. But sometimes employers might forget to send you a T4, or the T4 might get lost in the mail because you moved. It's your job to track down all the T4s you need to complete your taxes. The CRA won't like the excuse that you never reported that $25,000 of tree planting income because you never received a T4 for it.
KNOW YOUR SELF-EMPLOYMENT INCOME
Same with self-employment. It's your job to keep track of how much you made. Don't guess. You might overreport income just as easily as under report it. With overreporting, you'll pay more tax than you deserve to pay. Whereas with underreporting, you'll be hit with all sorts of interest and penalties by the CRA.
KNOW YOUR CAPITAL GAINS
Lastly, with capital gains or investment income, you likewise can't just "forget" to report it. You need to know how much you made.
When I was practicing as a Federal Crown tax prosecutor in the Toronto area I prosecuted a family who had jointly pooled their savings to buy some vacant investment farm land that had future development potential. They sold the property ten years later for a six million dollar profit. Smart and prudent, right? Not if all of the family investors then "forget" to report the capital gains as income on their respective tax return. That's a lot of tax evasion.
So know your gross income from all sources. That's the starting point for completing your tax return. Only once you know your gross income, can you do your damnedest to take advantage of all legally available deductions to make your net income (and thus your tax burden) as small as possible.
Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.