Income taxes are a mystery to many Canadians. The Income Tax Act is over four-inches thick, making it nearly impossible to know everything about Canadian taxes, even for professional accountants. How much do you know about the taxes you pay? Here's a list of 10 Canadian tax questions to test your knowledge.

TUTORIAL: RRSPs: The Benefits

1. Who has to file a tax return?
Not everyone has to file an income tax return, but you will if you have any of the following situations: You owe taxes, you sold capital property, you are splitting pension income with your spouse, you have to pay towards the Canadian pension plan (CPP) on self-employment earnings, you have to repay part of your Old-Age Security benefits, you still have amounts owing under the Home Buyers Plan or the Lifelong Learning Plan, or if you received certain advanced benefits. Even if you don't have to file, though, there are often good reasons to do so if you qualify for refundable tax credits.

2. Which spouse must claim the child-care deduction?
The deduction for day care, camp and other child-care fees must be claimed by the spouse with the least amount of taxable income. If the other spouse is a full-time student or a full-time inmate in prison, however, the higher income spouse can claim the deduction. (Yields in excess of 10% aren't rare, but these unique investments need to be chosen very carefully, see An Introduction To Canadian Income Trusts.)

3. What happens if your medical expenses aren't high enough to claim?
Claiming medical expenses requires some planning. One spouse may claim all of the medical expenses, including those from themselves, their spouse and their dependent children. The challenge is that the sum of those expenses must be over 3% of your net income or $1,926, whichever is less. Claiming the deduction on the spouses' income tax return with the least income allows you to take the largest advantage. Also, you can choose your period of time if it is a 12-month period ending in the year. Choose the period with the most expenses.

4. Does being audited mean you have done something wrong?
There are many types of tax audits and most of them simply require that you provide proof or clarify information on amounts that you have claimed on your return. If you have kept all of your documentation and have only claimed expenses and credits for which you are eligible, there is nothing to fear from a CRA audit.

5. How many years back can CRA audit you?
You are required to keep your tax records and documentation for six years plus the current one. CRA can go back and audit the past three years under normal circumstances. However, if they think that there is fraud or deception happening, they can go back indefinitely.

6. Is it better to get a tax credit or a tax deduction?
A tax deduction reduces your taxable income at the highest marginal tax rate that you are subject to. For example, if you have $53,000 in taxable income, you are in the 22% tax bracket. Your deduction reduces your taxable income at that rate. A tax credit gives everyone a reduction of taxable income at the lowest tax rate (15%) so that everyone gets the same benefit regardless of their tax bracket. If you are in any tax bracket except the lowest, a tax deduction gives you more money back. (Find out how to get a tax benefit from your mortgage like many Americans have, check out Creating A Tax-Deductible Canadian Mortgage.)

7. If you earn more income, is it possible to pay more in taxes than the extra you make?
This enduring myth has been responsible for all kinds of odd behavior, such as turning down overtime hours at work because of the worry that it will result in a net decrease in one's paycheck. Canada works on a marginal tax rate system, which means that you pay an increasing percentage of your income to federal and provincial tax authorities as your income rises. However, it is always a percentage and will never be more than the income itself. In 2010, the top federal tax rate was 29%.

8. Are lottery winnings taxable?
In Canada, lottery winnings are not considered to be taxable income. There are a few exceptions to the rule, however, for those who earn their living by placing bets. CRA considers that business income. If your ticket wins the big prize, though, you do not have to pay taxes on it.

TUTORIAL: Starting A Small Business

9. Can you claim your pets as dependants?
You can never claim a pet as a dependent. Dependents must be human. You may, however, be able to claim the costs of purchasing and maintaining a service animal if you require one to help you due to vision or other disability issues.

10. What are the penalties for filing returns or paying taxes late?
CRA charges interest on all taxes due at its prescribed rate that changes quarterly. If you have already filed your return and have not yet paid the balance, interest will continue to accrue until you pay it. If you file your return late, CRA charges a late-filing penalty of 5% of the balance owing plus 1% extra for every month or part-month the return isn't filed. If it is your second offense in four years, CRA has little sympathy. The penalties double to 10% plus 2% per month.

The Bottom Line
Remember, you don't need to memorize the Income Tax Act to file your own taxes. But by knowing the answers to the previous questions, you'll be able to prepare yourself for tax time throughout the year and not find yourself scrambling for information and receipts come tax-deadline day.

(For more Canadian tax tips, check out Tax-Saving Tips For Canadian Taxpayers.)

Related Articles
  1. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  2. Investing

    Does BlackBerry Have What It Takes To Succeed? (BBRY)

    The last several years have been tough for BlackBerry shareholders. With the company in the midst of an attempted turnaround, we examine their progress.
  3. Your Clients

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
  4. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  5. Taxes

    Free 2016 Tax Preparation! Top Online Services

    A place that fills out and files your taxes free of charge? It's no myth, as long as you have a simple return. Read on to find the top preparers.
  6. Entrepreneurship

    Multilevel Marketing Isn't Always A Scam, But It Often Is

    Nerium and Amway are popular direct sales companies that recruit new buyers and sellers to make a profit. Sadly, many direct sales firms are scams.
  7. Investing News

    Hillary Clinton's Liberal Orthodoxy

    Clinton's economic agenda laid out in July is divided into three broad groups: strong growth, fair growth and long-term growth. And her overarching goal is to "give working families a raise."
  8. Investing News

    Bernie Sanders: Socialist or Liberal?

    Sanders' pitch centers on economic inequality in the U.S., which is both more severe than it is in other developed countries and, if current trends continue, projected to worsen.
  9. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  10. Entrepreneurship

    10 Characteristics Of Successful Entrepreneurs

    Do you have the qualities of a successful entrepreneur? Those who do tend to share these 10 traits.
RELATED FAQS
  1. When should my tax refund arrive?

    More than 90% of income-tax refunds arrive in less than three weeks, according to the Internal Revenue Service (IRS). However, ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. Are Flexible Spending Account (FSA) items tax deductible?

    Flexible Spending Accounts (FSAs) are employer-sponsored, tax-favored savings plans expressly for the future reimbursement ... Read Full Answer >>
  4. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  5. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
  6. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
Trading Center