Category: Taxes

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The 5 smartest things you can do with your tax refund

Many of us are scrambling to get our paperwork in order to claim our tax refund as the April 30th tax filing deadline quickly approaches. The good news: The stress and anxiety of tax season is almost over.

More than two-thirds of Canadians will receive a refund of an average of $1,600 (*Cha-ching*) from the government. A number of different factors will determine the exact value of your reimbursement but thanks to free income tax calculator tools, like SimpleTax or TurboTax, you probably already have a good idea of what your tax refund will look like. Whether it’s a couple hundred dollars or in the 4-digit range, the question now becomes, “What do I do with my tax refund”?

Here are the top 5 ways to make the most of your tax refund.

Resist the urge to splurge.

Don’t fall into the trap of treating your tax refund like a winning lottery ticket. Go ahead and treat yourself to a little something like a nice meal out but some itches you should avoid scratching. As finance expert Suze Orman puts it, “Just because you can afford it doesn’t mean you should buy it.” A survey by Finder Canada found that 63% of Canadians make impulsive spending decisions on a yearly basis. A lack of careful decision making can result in buyer’s remorse so when tempted by an item with a hefty price tag, sit on it for a bit to avoid a guilty conscious. After all, your tax refund isn’t going anywhere.

Pay off your debt and pay-back your loans.

The average Canadian has nearly $30,000 in non-mortgage debt. This includes an average credit card balance of over $4,000. Many of us get by paying the minimum monthly payments, but since the average credit card interest rate hovers at 19%, it’s always better to pay sooner than later to avoid the high interest rates stacking up. Not only does debt put a dent in your wallet, debt can also have enormous emotional and psychological burdens. If you have debt, look at what you owe and pay back as much as you can. Prioritize ‘bad debt’ that incurs the highest rate of interest. By using your tax refund to pay off debt as quickly as possible, you’ll be one step closer to becoming debt-free.

Stash your cash in an emergency fund.

It’s easy to overlook the importance of an emergency fund when your finances are going well. With cash in the bank, it’s only natural to remain positive, which is perhaps why only 26% of Canadians have an emergency fund in place, with over a third of millenials having no emergency stash at all to offset unexpected financial difficulties. But the truth is you never know what the future holds. By putting some or all of your tax refund towards an emergency fund, you can be ready to tackle financial emergencies without going into debt.

Hack your life by investing in yourself.

Growing your knowledge and skills may give you a boost in self-confidence, but it can also provide great returns. You’re not only going to become more self-sufficient, but employers will find you more valuable, which means you can confidently negotiate a higher entry salary or ask for a raise. There are many affordable online courses you can take right now to expand your skill set. Not sure what skills will provide the best return on your investment in yourself? Check out this list of in-demand skills.

Save and invest towards a financial goal.

Whether you’re striving to meet a short-term financial goal like buying a new couch or a long-term one like buying a house, chances are that achieving your financial goals equates to saving money. Instead of placing the money from your tax refund under your mattress, start building towards your goals by saving your money into an investment account. By putting your money to work for you in a diversified investment portfolio that aligns with you financial profile, goals and risk tolerance, you’ll benefit from the forces of time and compound interest, and will likely reach your goal faster. Plus, you can reap the tax benefits of a TFSA or RRSP, depending on the type of goal you’re saving towards.

Pay it forward.

Donating to charity is not just a noble cause. It can also affect your bottom line. When you donate to one of Canada’s 86,000 registered charities, you can claim charitable tax credits or deductions with your official donation receipt. So why not do some good with your money from your tax refund, and in the process receive a little kickback from the government?

It can be difficult to decide what to do with your tax refund. When your instincts may be telling you “go spend!”,  reconsider what might be the best option for you given your financial situation and the financials goals you’re aiming for. Want to figure out what’s right for you? Drop us a message in our chat. We’re happy to help!

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Invest smarter Taxes

How to file your taxes if you have a side hustle

So you’ve got a side hustle: Smart. It’s becoming more and more challenging to afford the cost of living in Canada’s major cities, as housing costs outpace salary growth, and creating a second income stream means more money in the bank.

It also means that you’ve got more income to declare when you file your taxes. If you’re working for a business that deducts income tax from your paycheque, they are required to issue you a T4 so you can successfully file your tax return.

If you’re self-employed–whether you’re freelancing as a writer, running an Etsy shop, or driving for Uber–you often won’t get a T4, so tax time can become a bit confusing.  The key to filing your taxes is understanding your side hustle income and related expenses. I recommend hiring a tax professional to help you navigate the ins and outs of filing your side hustle income. After all, you can claim this cost as a professional expense and get a tax deduction the following year. If you’re ready to go it alone, here are some basics to get you started.

Understanding your income

You might have heard that you only need to include a certain portion of income on your tax return, but this couldn’t be further from the truth. The law states you must include all of the income you earn from any source on your tax return. That includes babysitting money, tips, and even cryptocurrency!

If you’ve received a T4, look for your employment income in box 14 and file this income on line 101 of your federal tax return. For any additional income you’ve made that isn’t in box 14, don’t forget to file your income in one of two ways:

  1. For tips or occasional earnings, file this income on line 104 of your federal tax return. If you work at a coffee shop on the weekend, this is where you would report your tips. This is also where you should report an income that didn’t incur any expenses. 
  2. However, if you have any expenses for earning your side hustle income, you should file this income on T2125, which is a form for the Statement of Business or Professional Activities.  It’s a little more work to claim your expenses, but it’s worth the extra effort because they may be eligible for a tax deduction.

Claiming your expenses

If you incur expenses from your side hustle, the most important thing you can do is track those expenses throughout the year. If you’ve got a record of your expenses, your life will be a lot easier when it comes time to fill out your tax return.

When you’re filling out your T2125, enter your expenses on part 4 of the form. Remember, you can only claim expenses that were necessary for making money. Expenses such as advertising, office expenses, and some home office expenses are examples of what you can claim. Here’s the full list.

If you plan to claim work expenses like your cell phone, internet, or travel, be sure to separate them from your personal expenses. It’s important to be honest and keep a record of everything because the Canadian Revenue Agency may check to see if the expenses you’re claiming are reasonable.  

Once you’ve completed part 4 of the T2125, complete the rest of your return and file normally. Your side hustle income and expenses will flow into your return and will be taxed like any other personal income you’ve earned.

Getting extra help

Additional income can really add up and sometimes first time freelancers are surprised with a large tax bill at the end of the year. If this happens, you can always organize to pay your bill in installments. To protect yourself in subsequent years, try to save 20-25% of your earnings so you’re not totalled come tax time.

If filing your additional income seems daunting, you can turn to online programs like Simple Tax, H&R Block, and TurboTax for help filing your return online. These programs will prompt you to answer questions that pertain to your specific situation, guide you through your return, and ensure you are filling out the correct forms.

If you’re still overwhelmed, it’s not too late to reach out to a tax professional, but returns are due April 30, so start hustling!

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Invest smarter Taxes

Ask an expert: What taxes do I have to pay on my Moka investments?

The deadline to file your 2018 income tax return is April 30 for most Canadians, so we’re here to help you figure out what taxes to pay on your investments, if any.

The money you’ll owe is determined by the type of Moka investment account you have. We currently offer non-registered accounts, Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).

Not sure what kind of account you have? No problem! Just click on your goal in the Moka app and look directly under the goal name. If you have more than one goal, you have more than one investment account with Moka, so be sure to check all of them.

Jump to:

Paying taxes on a non-registered account

Paying taxes on a TFSA

Paying taxes on an RRSP

What taxes do I pay on a Non-Registered Investment Account?

Quick answer: You pay taxes only on the income generated by your investments.

Long answer: You can invest and withdraw as much as you want in a non-registered account. You will only pay taxes on income generated by your investment. There are three different kinds of income to know about.

  1. Dividends are profits that a company shares with its investors. If you own stock in a company that pays dividends, you earn a certain amount of money for each share of the company that you own.
  2. Interest is money paid regularly at a particular rate as compensation for lending a company money (i.e. buying bonds). In the case of your Moka account, interest may be paid out from bonds and money market securities.
  3. Capital gain is the profit you make from selling the holdings in your account. You may see a capital gain or loss following a withdrawal or change of investment model in your Moka account, as in either case, investments may be sold in your account.

There is no penalty for withdrawing from a non-registered investment account, however, please remember you will be taxed on any capital gain arising from this withdrawal. How exactly does that work? Let’s say you deposit $100 in your account. Your money is invested and grows to $105. If you decide to withdraw that $105, you would be taxed on the $5 you made from selling your investment, but only 50% of capital gains count as income.

If you don’t have a non-registered account with Moka, then you have an RRSP or a TFSA. These accounts are registered investment accounts, which means they were set up by the government to provide certain tax advantages as incentives to save and invest.  There is a limit to how much you can contribute to TFSAs and RRSPs and there is a different kind of penalty for withdrawing from either account.

What taxes do I pay on a TFSA?

Quick answer: You don’t pay taxes on money in a TFSA.

Long answer: Tax-Free Savings Accounts can be used for saving and investing. As the name suggests, money inside a TFSA is tax-free.

However, there is a limit to how much you can contribute to your TFSA every year. In 2019, the maximum amount that Canadians can contribute to a TFSA is $63,500. Please note that this limit may differ depending on your age and how long you’ve been living in Canada. If you’re not sure how much you can contribute, please speak with a tax professional.

If you exceed your contribution limit, there is a financial penalty. Namely, you’ll owe 1% of the amount you’ve over-contributed every month until you withdraw the excess or become eligible for more contribution room. For example, if you over-contributed $100, you would have to pay $1 per month until you corrected the situation.

You can withdraw money from a TFSA without paying taxes, however withdrawals impact your ability to contribute to your TFSA in the future. How would this happen? Imagine you have already made the maximum contribution for 2019. If you withdrew money to buy something but then decided against the purchase, you would not be able to put that money back in your TFSA in 2019 because you already contributed the maximum amount. However, you can re-contribute that amount in 2020. You can learn more about withdrawing from a TFSA here.

What taxes do I pay on an RRSP?

Quick answer: You pay taxes on any money you withdraw from an RRSP.

Long answer: Think of an RRSP as a tax-deferred account: money grows tax-free until you withdraw it. Any money you withdraw from an RRSP is considered taxable income. When you withdraw the money, our custodian BBS Securities Inc. will automatically withhold some of what you owe in taxes, but you will still have to declare the withdrawal as income that year, and you may be asked to pay additional taxes depending on your marginal tax bracket.

There is also a limit to how much you can contribute to an RRSP every year. If you exceed the contribution limit by more than $2,000 there is a financial penalty. You can contribute the lesser of 18% of your income or the annual contribution limit, which is $26,500 for 2019. To see how much contribution room you have in any given year, get out your Notice of Assessment from the previous year and look for the page that covers RRSPs.

You’ll be able to find all the tax documents you need from Moka at the end of March. Look for your 2018 Trust Income Report in the Accounts Tab under Documents > Annual Documents > Tax Information. If you’ve made over $100 in trust income on your investments, we will also send you a T3 slip.

If you have any questions about how to read tax documents from Moka, please reach out! For further questions about filing your taxes, we strongly suggest you consult a government website or a licensed tax professional.

What other questions do you want your portfolio manager to answer? Send us an email at support@moka.ai.