By Ryan May
‘Tis the season. Little envelopes are filling mailboxes, people are gearing up for some big spending and students are getting ready for finals and looking forward to the break. Unfortunately, it’s not Christmas, at least for anyone who is not an accountant or a taxman. Instead, it’s tax season: the envelopes are for tax slips, people are planning how to spend their refunds and students are headed into the summer break.
To ease this stressful time the Gauntlet’s Ryan May will provide readers with a basic guide to figuring out what the important numbers on those tax slips are and where they need to go on the stack of forms the government mails out.
This guide is based on the paper T1 General Alberta sent to anyone who filed a paper return last year. Copies are also available from Canada Post Outlets, including the one on campus next to the University Bookstore.
Please note that everyone’s tax situation is unique and that this article is only a general guide for university students. People with complicated situations or questions please refer to the Canada Revenue Agency website at www.cra-arc.gc.ca/menu-e.html or contact a tax professional.
Part 1:
Canadian Income Tax
For those of you who have not had the joy of taking Finance 317, let’s start with a quick overview of the Canadian income tax system.
Canadians pay income tax to both the federal and appropriate provincial government, but for all provinces except Quebec collection and filing are handled centrally by the Canada Revenue Agency. Employers deduct tax from most employees’ earnings and remit it to the CRA. Because the amount of income tax deducted is a rough guess based on employment income, you have to file an annual tax return to determine the actual amount of income tax that you should have paid in the previous year. If you overpaid you will receive a refund and if you underpaid you must make up the difference.
Federal Tax
The majority of the income tax you pay goes to the federal government, and is calculated based on a system of progressive taxation, which means that each additional dollar earned is subject to a higher tax rate. In practice however, the government defines a number of tax brackets.
This means that your first $36,378 of income is taxed at a rate of 15 per cent, your next $36,378 is taxed at 22 per cent and so on. The majority of students will fall in the first tax bracket–if they have to pay tax at all.
The difficulty in calculating taxes comes from trying to determine your taxable income for the year. Taxable income includes not only employment income (T4 slips), but investment income (T5 slips), scholarships and bursaries (T4A slips) and deductions such as the basic personal amount, tuition (T2202A slips), interest paid on students loans and EI and CPP premiums. It is important that you collect all of your tax slips for the year in a safe place. If you are missing your T2202A slip for your University of Calgary tuition that’s because the university no longer issues paper slips–you will have to print the PDF off of the InfoNet here.
Provincial Tax (Alberta)
Unlike the federal government and all the other provinces and territories, Alberta does not use a system of progressive taxation and instead levies a flat tax of 10 per cent on all taxable income. Your provincial return is calculated largely using numbers from your federal return, but with different deductions. Unless specifically stated, all references below are to your federal return.
Part 2:
Income
Taxable income is calculated on your T1 General form. For the majority of students only the Total Income Section will apply and line 150 will represent your taxable income–only the relevant parts of this section are covered below.
Employment Income
The majority of employment income should be taxed by your employer who will also issue you a T4 slip at the end of the year for the amount deducted. The total of all the box 14s on your T4 slips is your employment income for the year and should be entered on line 101 of your return. If your job(s) involved commission work you also need to total all box 42s and enter the amount on line 102.
If you have any untaxed employment income, and claiming it will not force you to pay income tax you should record it under “Other Employment Income”. Claiming untaxed income will not cost you anything while earning you more Registered Retirement Savings Plan credits to carry forward to future years.
Investment Income
If you held any investments such as GICs, savings accounts, mutual funds or stocks in 2005 and received a T5 slip you need to claim any income that you received from them. Dividends (box 11) and interest (boxes 13,14 and 15) are treated separately, calculated on Schedule 4 Statement of Investment Income and entered on lines 120 and 121 respectively.
Dividend income is also eligible for a tax deduction, please see below.
Scholarships and Bursaries
Scholarships and bursaries are a major source of funding for some students, but you may not realize that they are subject to income tax. The university will issue you a T4A slip for any awards that they administer, but private foundations may not. Even if you do not receive a T4A slip you should still claim the amount to avoid possible problems in future years.
You must claim any amounts that exceed your annual exemption on line 130. You may exempt either $500 or $3,000 of scholarships or bursaries per year, whichever is applicable. For example, if you received $1,700 in scholarships you could exempt only $500, but if you received a $4000 bursary you could exempt $3000.
Part 3:
Deductions
Deductions are calculated on Schedule 1 Federal Tax and use the taxable income calculated on your T1. All line references below are to Schedule 1 unless otherwise noted.
Basic Personal Amount
The basic personal amount is a non-refundable tax deduction for all Canadians. A non-refundable deduction reduces your taxable income, but cannot go towards receiving a refund. For 2005 the federal amount is $8,648 and Alberta provincial amount is $14,523.
CPP and EI Contributions
Any contributions you made to the Canada Pension Plan or Employment Insurance through your employer are not subject to tax. Total all the CPP (box 16) and EI (box 18) contributions on your T4 slips and enter those amounts on lines 308 and 312 respectively.
Interest Paid on Student Loans
Total any interest you paid on federal or provincial student loans in 2005 and enter this amount on line 319.
Tuition – Schedule 11
Tuition amounts that are eligible to be deducted are calculated on Schedule 11 Federal Tuition and Education Amounts and the total is then entered on line 323 of Schedule 1.
In order to complete Schedule 11 you will need the PDF version of your University of Calgary T2202A form (available on the InfoNet) and, if you filled taxes for 2004, your 2004 Notice of Assessment.
If you are carrying forward any tuition amounts from 2004 please enter the amount on your 2004 Notice of Assessment on line 1 of Schedule 11.
Complete lines 2 to 4 of the schedule using your T2202A slip as indicated then enter their total both boxes of line 5. Add line 1 and 5 to get line 6. This is the total amount of tuition that you may claim for on your 2005 federal income taxes.
Enter the amounts requested into lines 7 and 8, then subtract to get line 9. Enter the lesser of line 1 or line 9 into both boxes of line 10. You also need to enter the difference between line 9 and line 10 on line 11. Line 12 is the lesser of line 5 or line 11 and it is then added to line 10 to get line 13, your federal tuition deduction for 2005. Copy the amount in line 13 to line 323 of Schedule 1.
If your deduction for 2005 is less than your available total you now need to complete line 14 to 16 and line 21.
Your completed Schedule 11 must be attached to your return form.
Donations and Gifts
Even if you did not make any charitable donations this year a portion of your tuition is classified as a donation to various organizations on campus. The amount of this donation is listed on your T2202A form just above the tuition information.
Total the amount from your T2202A and any donations that you made in 2005 for which you have receipts and enter it on line 349.
Dividend Tax Credit
As mentioned above, the federal government gives a partial deduction of 13.3333 per cent for all Canadian dividend income. If you entered an amount on line 120 of your T1, multiply it by 13.3333 per cent and enter the product on line 425.
Other Deductions
Other deductions such as medical expenses and moving costs are beyond the scope of this article. Please refer to the CRA website for more information.
Part 4:
Congratulations!
You have now covered the most common parts of a university student’s federal income tax and–if you do not have anything else to add to your return–can now complete your federal tax calculation as indicated on Schedule 1 and your T1.
Provincial Return
In order to complete your return you must now calculate your provincial income tax. As mentioned earlier, your provincial return is largely based on numbers taken from your federal return, but with different rates and deductions.
If you resided in Alberta for the majority of 2005 you should file an Alberta return using form AB428 Alberta Tax and Credits. You will also need to complete an Alberta Schedule 11–Schedule AB(S11) Provincial Tuition and Education Amounts. Both forms are nearly identical to their federal counterparts and reference all related lines.
Filing
You can now complete tax your return. Remember to transfer all amounts from your Schedules and provincial return. Then complete your final tax calculation on the last page of your T1 to determine if you are going to receive a refund or owe the government.
After completing everything copy it to the second set of forms included in the booklet. Attach your provincial return and Schedule 11, federal Schedules 1 and 11, and copies of all your tax slips and receipts inside your second T1 as indicated. Place everything in the envelope provided, apply standard postage and mail it. The CRA must receive your return by April 30. Processing of paper returns takes four to six weeks so do not expect to receive your refund until the middle of June or later.
Part 5:
Making it Easier
After learning about everything that is involved in preparing a pencil and paper return, the task of filing a tax return probably appears quite daunting. Luckily, there are a number of options available that make tax filing quicker and easier, and best of all they’re free.
SU Volunteer Tax Program
Operated by the Students’ Union, the Volunteer Students Tax Program is free for students with an income of less than $35,595. All students need to do is collect all the relevant information such as tax slips (T4s, T5s, T4As, T2202As, etc), receipts for donations and tax deductible expenses and your 2004 Notice of Assessment.
A 15 minute appointment is required to drop off your information during which a volunteer will review your information to ensure that the return is eligible for the program and that all the documentation needed is present. A Canada Revenue Agency trained student volunteer will then prepare your return for you. The average completion time for a return is 14 days and both manual and electronic filing options are offered. Electronic filing reduces government processing time to about two weeks versus four to six weeks for paper returns.
The program runs from March 1st to April 12th and its office in MSC 202 (beside the bank machines in the food court) is open from 10 a.m. to 4 p.m. from Monday to Thursday. For more information on the VTP and a complete listing of necessary information visit the program’s webpage here.
Netfile
Netfile is the CRA’s online filing method for individuals. In order to Netfile, both CRA certified software and an Access Code are required. Certified tax filing software comes in two forms: packaged software you buy in a store and online services that you pay for with a credit card. Fortunately, a number of online services offer their services free to people with a gross income of less than $25,000. If a person does not have a code they can request one online here. A SIN number, birthdate and 2004 tax return are required.
Most tax filing software uses an interview-style system that ask users a set of questions to determine what numbers they need to enter into which forms. A help system is also a common feature, offering instant access to relevant information when problems or questions crop-up.
Two major online services offering a free option for low-income earners are UFile.ca and QuickTaxWeb (by Intuit, maker of the Quicken line of money management software). Both will provide a “.tax” file as well as a PDF file containing a copy of the tax documents completed with the information provided by the user. The “.tax” file can be used to Netfile on the CRA site here while the PDF can saved for future reference, printed off and mailed in or used to Telefile (see below).
A complete list of CRA certified Netfile software is available here.
Telefile
In addition to filing online with Netfile it is also possible to file electronically over the phone. A touchtone phone and Access Code (the same as used for Netfile) are all that is required.
After completing their return, either on paper or using an online service, a person calls the Telefile number (1-800-959-1110) and enters the necessary information by line number when prompted. The process takes only a few minutes and because the return is filed electronically, turn around time is approximately two weeks.
With the rise of Netfiling and the availability of the VTP however, Telefile presents a less appealing option for filing. More information on the system can be found here.