Maybe you’re considering purchasing some income tax preparation software and attempting to do it yourself? For some that may be a viable option, but tread cautiously – you may be putting your financial well-being at risk.
The Canada Revenue Agency (CRA) has offered Canadians the option to file their tax returns via the Internet for several years now. This service has quickly become popular. When it was first offered, the CRA received 443,000 individual tax returns via the Internet. In 2004, it received close to four million.
Taxpayers who prepare their returns themselves and send them via the Internet must use NETFILE. This service offers several benefits including: Security and confidentiality; Quick refund, usually within eight business days; Greater accuracy (fewer transcription errors occur when tax preparation software is used); Nothing to be mailed; No receipts to be submitted, unless requested and immediate acknowledgement of receipt of the tax return. The CRA says that it actively encourages individuals to e-file and that it’s taking steps to process 75% of all tax returns electronically in the coming years. This all sounds good in theory. The only problem is, how can you be sure that you’re getting the best deal when it comes to filing your taxes?
Most do-it-yourself tax preparation software promises the same things – to minimize the amount of time you spend on your return, to maximize your tax savings, and to allow you to take control of your tax preparation. Saving time on tax return preparation is always a good thing, but are you really saving time when you have to install and learn new software which you’ll probably only use once, and then it’s obsolete?
When they promise that you’ll maximize your tax savings, that assumes a certain amount of knowledge of your particular circumstances and the options for reporting and filing which will generate the most savings for you. That involves knowledge of the rules and of your financial circumstances. That’s a lot to ask of a piece of software that uses canned questions to walk you through the preparation of your return.
The Income Tax Act together with regulations is almost three thousand pages thick. Within those pages are a myriad of options for filing your personal income tax return. It’s impossible to condense all that information down to a few screens of questions and expect to generate a complete, well-thought-out tax return.
For basic returns, that is, for people who have a T4 slip from employment, a T5 slip for some interest income, and generally have basic information to file, the tax software is great. It checks itself for logic errors and helps you pop the numbers in the right boxes and prepare an accurate tax return.
Using a licensed tax preparer is probably the best thing you can do to ensure that your return is prepared correctly and accurately, and to satisfy yourself that all the tax savings options specific to your situation have been considered. For people with basic information to file, any software and preparer will do, however when you start to get into issues which require judgement and a knowledge of the rules, you need professional consideration and competent help.
Take for example self-employed individuals who may be at a point where incorporation makes sense. How about the payment of salaries to dependents who help at the business? What about income splitting with spouses, out-of-pocket expenditures which are business related, deducting the expenses related to your home office. How do you deal with losses? Are the losses on capital or on income account? Are the losses currently deductible and is there any carryover allowing recovery of taxes paid in prior years? How about limited liability with respect to business operations?
These are just a few of the multitude of considerations that require some thought. Most preparers will run through a mental or written checklist to ensure that options appropriate to your financial situation have been considered. The judgement of an experienced tax preparer will give you comfort in determining whether you should expense 75% of the vehicle you use for business, or perhaps a higher percentage should be used given your circumstances.
The tax sofware is pretty good at calculating numbers, but it’s only as good as the input. If your numbers are wrong, then the answer your software generates will be wrong and you may not find that out until you get a Notice of Reassessment with a Balance Due indicated. That starts a whole new chapter in that you may have to file a notice of adjustment or notice of objection, or just roll over and write the cheque.
For self-employed individuals, business owners, investors, people with losses both capital and non-capital, people with discretionary deductions such as medical expenses and alimony, there are more considerations and options than a simple “question and answer” form can cover. When you consider the cost and time to prepare your return by yourself against the possibility of the cost of overlooked benefits, it’s no contest – you should seek out a competent tax preparer to help you.
