From Student Debt To Tax Tips – We Cover All The Details No One Told You About

Not sure where to begin with your taxes or finances? We’ve compiled a list of the top questions Canadian medical residents ask us. Whether you’re searching for a specific answer or figuring out what questions you should be asking, this is your starting point. And if you have a question that’s not covered here, we’d love to add it to our growing list.

The consequences of missing your tax return filing deadline depend on whether you owe taxes or are expecting a refund. Here’s a breakdown of both scenarios and the potential issues that could arise:

If You Owe Taxes

Failing to file by your deadline (April 30th or June 15th, depending on your scenario) when you owe taxes can lead to significant consequences:

Late Filing Penalties: The Canada Revenue Agency (CRA) charges a penalty of 5% of the balance owing, plus 1% for each additional month your return is late, up to a maximum of 12 months. These penalties can grow quickly, adding to your financial burden.

Accruing Interest: On top of penalties, interest starts accruing on your unpaid taxes from May 1st. This interest is compounded daily, increasing the total amount you owe over time.

Impact on Future Filings: Repeated late filings can lead to higher penalties (10% of the balance owing, plus 2% monthly for up to 20 months). If your income tax affairs are more complex due to investments, professional corporations, or other factors, the costs and risks escalate.

Collections and Credit Impact: If taxes remain unpaid, the CRA may take collections action, such as garnishing wages or placing a lien on assets.

If You Are Expecting a Refund

While the immediate financial penalties may not apply if you’re due a refund, there are still risks and missed opportunities:

Delay in Receiving Your Refund: Not filing your return means you won’t receive your refund until the CRA processes your return—no matter how long you wait to file. Delayed refunds can affect your cash flow, especially if you rely on that money for expenses or savings.

Missed Credits and Benefits: Many government benefits, such as the GST/HST credit or Canada Child Benefit, are tied to your annual tax return. Not filing on time may delay or disrupt these payments, impacting your household finances.

Loss of Historical Refunds: If you wait more than three years to file a return where you’re due a refund, you forfeit the right to claim it entirely. The CRA does not issue refunds for returns filed after this timeframe.

Additional Considerations

Spouse or Common-Law Partner’s Filing Deadline: If your spouse or common-law partner is self-employed, their filing deadline extends to June 15th, which applies to both of you. However, any taxes owing are still due by April 30th. Missing deadlines could complicate shared tax obligations.

Compounding Issues: Even if you believe you’re owed a refund, unresolved late filings over several years can create administrative headaches and possible CRA scrutiny.

If you think you’ve missed a deadline or are unsure of your filing obligations, immediately seek professional advice. Often, a solution can be found to bring your taxes up to date efficiently and effectively.

Yes, there is a penalty for filing your taxes late if you owe money to the Canada Revenue Agency (CRA). The penalty and its implications depend on your specific circumstances, including whether you owe taxes or are expecting a refund. Here’s how it works:

How the Late Filing Penalty is Calculated

If you owe taxes and file your return after the deadline (April 30th for most individuals, or June 15th if you or your spouse/common-law partner is self-employed), the CRA imposes:

• Initial Penalty: 5% of the balance owing.
• Monthly Penalty: An additional 1% of the balance owing for each month the return is late, up to 12 months.

For example, if you owe $10,000 and file your return three months late, the penalty would be:

• 5% of $10,000 = $500 (initial penalty)
• 1% of $10,000 x 3 months = $300
• Total penalty: $800

If you repeatedly file late within a four-year period, penalties can double to 10% of the balance owing, with an additional 2% per month for up to 20 months.   So, it’s imperative that you file a return each year and on time.

What If I Am Expecting a Refund?

If you are owed a refund, you won’t face late filing penalties. However, there are still potential risks:

• Delayed Refund: You won’t receive your refund until you file your return.
• Missed Deadlines for Benefits and Credits: Benefits like the GST/HST credit and the Canada Child Benefit rely on up-to-date tax returns. Filing late could delay or suspend these payments.
• Forfeited Refunds: If you don’t file your return within three years of the original filing deadline, you lose the right to claim your refund.

Risks of Future Reassessments

Even if you are due a refund, late filing can cause problems down the road. For example:

• Reassessment Triggers: If the CRA reviews or audits a future tax year and determines you owed taxes in the year you filed late, penalties and interest will retroactively apply to the balance owing. This could significantly increase the financial consequences.
• Reduced Credibility: Consistently filing late could increase the likelihood of CRA scrutiny in future years, leading to more frequent audits or reviews.

Keeping accurate records of your expenses is essential for managing your finances and ensuring you claim all eligible deductions at tax time. Here’s how to do it effectively:

1. Use One (or at Most Two) Credit Cards:

Consolidate your purchases onto a single credit card, or at most two, to simplify tracking. This provides a convenient, itemized record of your spending.

2. Credit Card Statements Are Not Receipts:

It’s important to understand that credit card statements alone are not sufficient to support your claims during an audit. While they show the amounts and vendors, the receipt provides the crucial details, such as the date, specific items or services purchased, and any applicable taxes. Without a receipt, your claim could be denied.

3. Avoid Paying with Cash:

Cash transactions are harder to track and rarely come with sufficient documentation. Using your credit card ensures a reliable record of your expenses.

4. Always Obtain Receipts:

Collect a receipt for every purchase, regardless of whether you think it might be deductible. This ensures you’re prepared to substantiate your claims if reviewed.

5. Organize Receipts Monthly:

Place receipts in envelopes labeled by month and corresponding credit card statement. This helps you quickly match receipts to transactions if needed during tax preparation or an audit. Retain these records for at least six years.

6. Keep It Simple:

Tracking expenses shouldn’t take more than 20 to 30 minutes per month if you stay consistent.

Need Help Staying Organized?

Download our Expense Tracking Worksheet for Self-Employed Health Professionals and instructional video. Tailored for physicians, these tools simplify expense tracking and ensure you’re well-prepared to substantiate your claims. By dedicating a little time each month, you’ll save yourself unnecessary stress in the future.

Visit the CRA Automobile Expenses Guide for more information. For more details or tailored instruction you can also book a call here.

Starting to invest as a medical resident is an excellent way to build wealth over time. While it’s tempting to try managing your own investments, it’s a complex field that requires time, expertise, and vigilance. Here’s what you should consider:

1. Focus on Financial Basics First:

• Build an emergency fund with 3–6 months’ worth of living expenses.
• Address high-interest debt, like credit cards, first and then and evaluate whether your student loans should take priority over investing.

2. Get Professional Advice:

Seeking a reputable investment advisor is essential. A skilled advisor can help you grow your investments and preserve your capital, allowing you to focus on your career and other priorities. Don’t try to go it alone—investing without proper guidance can lead to costly mistakes.

3. Use Tax-Advantaged Accounts:

Consider starting with a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). An advisor can guide you on how to maximize these accounts for your financial goals.

4. Be Cautious and Informed:

Investing involves risks, and different types of income—like dividends, capital gains, or interest—are taxed differently. An advisor can help you navigate these complexities effectively.

Both Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) are powerful tools to help you save for your future. Understanding their differences will help you decide which account to prioritize based on your financial goals.

Tax-Free Savings Account (TFSA)

• Tax Treatment: Contributions to a TFSA are made with after-tax dollars and are not deductible from your income. However, any growth (interest, dividends, or capital gains) and withdrawals are tax-free.
• Flexibility: You can withdraw funds from a TFSA at any time, for any reason, without tax consequences. Contribution room is restored in the following year, allowing for future contributions.
• Best Use: TFSAs are ideal for short- and medium-term savings goals, such as building an emergency fund or saving for a significant purchase. Since withdrawals don’t affect your taxable income, TFSAs are also great for long-term growth if you expect to be in a higher tax bracket in the future.

Registered Retirement Savings Plan (RRSP)

• Tax Treatment: Contributions to an RRSP are tax-deductible, reducing your taxable income in the year of contribution. However, withdrawals are taxed as income at your marginal tax rate.
• Growth: Investments grow tax-free within the account, allowing for compounding returns over time.
• Home Buyers’ Plan (HBP): The HBP allows first-time homebuyers to withdraw up to $60,000 per individual ($120,000 per couple) from their RRSP to purchase a home without immediate tax consequences.
  • Temporary Payment Relief: Recent measures introduced allow participants who make their first withdrawal between January 1, 2022, and December 31, 2025, to defer the start of the 15-year repayment period by an additional three years. This means repayments start in the fifth year following the withdrawal, providing additional flexibility for new homebuyers
• Best Use: RRSPs are ideal for long-term retirement savings and are most effective when contributions are made during high-income years, maximizing the immediate tax deduction. RRSPs also play a key role in financing your first home when combined with the HBP.

Which Should You Use?

1. First-Time Homebuyers:

• • If you plan to purchase your first home, RRSP contributions can be strategically used to take advantage of the Home Buyers’ Plan.
  • To maximize benefits while keeping cash accessible, contribute no more than $60,000 (per person) to your RRSP for future withdrawal under the HBP. Combining the RRSP HBP with the First Home Savings Account (FHSA) creates a powerful strategy to help finance your first home purchase.

2. Maximizing Tax Benefits:

• • If you’re in a lower tax bracket (common during residency), you might consider contributing to your RRSP but deferring the tax deduction until a future year when your income is higher. This approach ensures the tax savings are maximized when your marginal tax rate increases.

3. Avoid Overcontributions:

• • Be cautious not to overcontribute to any registered account (RRSP, TFSA, FHSA). Overcontributions can result in severe penalties and compounded daily interest, which currently stands at 9% per annum (2024 rate).
  • To avoid this, refer to the contribution limit on your most recent Notice of (Re)Assessment. If you’ve overcontributed, seek assistance from a qualified tax professional to address the issue and minimize penalties.

The TD1 form is an important document for employed individuals, including medical residents, fellows, and new-to-practice physicians. It is your direction to your employer regarding the tax credits you are entitled to, which determines how much tax is deducted from your paycheque.

Purpose of the TD1 Form

The TD1 form ensures your employer calculates the appropriate amount of tax to withhold from your income based on your individual tax situation. For medical residents, this form is particularly important for applying current-year tuition credits to reduce income tax deductions.

• For Current Year Tuition Credits:
  If you have tuition credits available from the current tax year, completing the TD1 form correctly will allow your employer to reduce the amount of tax withheld from your paycheque. This means you’ll see immediate tax savings rather than waiting for a refund after filing your tax return.
• When Tuition Credits are Exhausted:
  It’s equally important to update your TD1 form when your tuition credits are fully used. Without an updated TD1, your employer may withhold less tax than needed, potentially leading to a tax balance owing at the end of the year.

What About Tuition Credits from Previous Years?

If you have unused tuition credits carried forward from prior years, you’ll need to complete a T1213 form (Request to Reduce Tax Deductions at Source) instead of relying solely on the TD1 form.

• Purpose of the T1213 Form:
  This form is submitted directly to the CRA to request permission for your employer to reduce the tax withheld from your income based on your carried-forward tuition credits.
• Process for Submitting a T1213 Form:
  1. Complete the form and attach supporting documents, such as your Notice of Assessment or a summary of unused tuition credits.
  2. Submit the form to the CRA for approval.
  3. Once approved, provide the CRA’s authorization to your employer to adjust your tax deductions at source.
• Planning Ahead:
  Since the CRA processing time for a T1213 can be several weeks, consider submitting the form early and, if possible, include requests for multiple years’ worth of credits to streamline the process.

We can help! We assist medical residents in preparing these forms at no charge. This includes ensuring your TD1 is completed correctly for current-year tuition credits and helping you navigate the T1213 process for carried-forward tuition credits. If you’re unsure whether you need to update your TD1 or submit a T1213, contact our office. Our experience with clients in situations like yours means we can guide you quickly and effectively.