How To Avoid Tax Debt As A Member Of Canada’s Growing Gig Economy

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Whether it’s driving an Uber between shifts, selling the product of your hobby on Etsy or renting out the apartment in your basement as an AirBNB, more and more Canadians are opting for on-the-side jobs, becoming members of Canada’s ever growing “Gig Economy”.

The number of Canadians working on the side has more than doubled in the last 40 years according to Statistics Canada, and research conducted by Intuit Canada predicts that by 2020, 45% of Canada’s work force will be generating self-employed income under a “Gig Economy”.

What’s a “Gig Economy”?  It describes a growing workforce made up of people earning a living through “gigs” like freelancing work or short term contract jobs.  Drivers of the Gig Economy are the brave many who choose to ‘be their own boss’.

As a Licensed Insolvency Trustee, I’ve listened to many self-employed individuals talk about the financial struggle of dealing with insurmountable tax debt.  In many cases, the tax debt was so overwhelming that the only option was to file a personal bankruptcy.  The importance of being diligent with filing your income tax returns and making your remittances to Canada Revenue Agency on time is undeniably real and can save you the cost of penalties, interest and sleepness nights.

STAY ON TOP OF THINGS BY:

Having a proper record keeping system in place.

  • The moment you start working for yourself is the moment you have to start maintaining proper books and records. Not only will this help you at tax time, but in preparation of a audit from CRA, you’re expected to keep all of your paperwork for at least six years.
  • Keep a record of your income/revenue and expenses. What’s crucial is the day-to-day recording of transactions impacting your business. There are all sorts of methods available that will help you do this like using software or a spreadsheet. There are also apps you can have on your phone like Expensify or Freshbooks which helps you capture expense receipts, mileage, send invoices, etc.

Filing your taxes on time.

  • As we know, April 30th is the deadline for us as taxpayers to file our income tax returns. Self-employed people have a deadline of June 15th; however, CRA begins charging interest on taxes owing starting April 30th. It is important to pre-plan knowing you need to have your remittances paid by April 30th to avoid interest charges.
  • Filing your return late triggers penalties. The moment you’re late, you’re hit with a 5% penalty of the balance owing, plus an additional 1% for every month the return is late. Over the year, this could add up to a maximum penalty of 17%.
  • Familiarize yourself with CRA’s online portals called “My Account or My Business Account” where you can check on the status of your tax accounts (like your GST account), the remittances you’ve made and to stay on top of important due dates.

Knowing that the cash you receive from a job you complete isn’t disposable income you have available to spend as you wish.

  • Although there are benefits of being self-employed, one of the pitfalls is overlooking the fact that your income is still subject to taxes which must be paid to CRA. A good routine is to set aside 20-25% of what you earn for taxes. Remember, even though your tax return must be filed by June 15th, you must pay what you owe to CRA by April 30th.

The accumulation of tax debt year over year has dire consequences. CRA has a number of powers and remedies to collect what you owe them and most often, there is no notice given to you.

HOW CAN CRA COLLECT TAX DEBT?

  • You’ll be charged compounded daily interest on the balance. The fact that the debt keeps increasing should be enough motivation to pay it off as quickly as possible.
  • You’ll lose your GST credits or future tax refunds. CRA can make use of a ‘statutory set-off’ by applying your credits and refunds to the tax debt.
  • Your bank account funds can be seized. CRA can garnish without going to court and can serve notice on your bank or any party who owes you money.
  • Your home can be affected. CRA can register your debt with the Federal Court of Canada and obtain a “Certificate” which can be enforced like a judgment order. This certificate can be registered against your property which means if you sell it, you might not see any equity since CRA will get paid first.

These are stressful situations to face but being proactive is key to ensuring you stay on the good side of CRA. Taking simple steps like hiring a good bookkeeper or accountant to help you stay compliant while you focus on the business is money worth spending.  Be realistic about your skills and abilities when it comes the paperwork.  It’s true that record keeping isn’t everyone’s strong suit, but CRA does not see this as an acceptable reason to to ignore tax filings and remittances.

When in doubt, seek help from a professional.  If you’re unsure how to get started, seek help from a tax professional. If you’re struggling financially and worried about paying off your tax debt, speak to a Licensed Insolvency Trustee about your options before CRA takes action against you.

Freida Richer LIT

 

Freida Richer is a Licensed Insolvency Trustee with our Edmonton, Alberta practice. You can watch her Money Smarts segment on the third Monday of every month on Global Morning News Edmonton.

Having “The Talk”: Why You Should Define Your Relationship With Credit Cards

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In most relationships, there tends to be a “give and take” mentality that is mutually agreed upon from the start. Your relationship with credit cards is no different. While credit cards offer ease and financial comfort when it comes to obtaining goods and services, their “buy now, pay later” philosophy comes with the large commitment of promising to use future income to pay past purchases.

THINGS TO CONSIDER BEFORE COMMITTING

  • Know yourself and your habits. It’s important to self-assess before applying for a credit card. For example, if you’re a spender, applying for a credit card with a lower limit might work in your best interest, by limiting that “buy now, pay later” mentality.
  • Set rules for the use of the card and how you plan to make payments. A credit card must be used, the bill received and the payment made on time in order to build a positive credit history. Make sure you have or will have the money to pay off the card, or at least the minimum payment, at the time of the purchase and that you know when the payments are due. Setting reminders on your phone or marking the payment due date down on a calendar are helpful ways to stay on track.
  • Be choosy about obtaining credit. Limit the number of cards you carry. Do you really need more than one card? Don’t fill out department store surveys and be careful when shopping around for credit. Too many “hits” on your credit report can actually lower your credit score.
  • Understand the costs associated with your card. Are there monthly fees? Annual fees? How is interest charged on your credit card? Take into consideration your spending plan to see how the credit card payments, interest, or even rewards program will work into your budget and financial goals.

KNOW YOUR TYPE

Before committing to a credit card, it is important to know which type of card will work best for your needs, budget and credit score. Everyday credit cards from banks, financial institutions and credit card companies, and secured credit cards – credit cards obtained by providing a security deposit in case payments aren’t made – are the only credit cards that will help you build (or rebuild) credit. Debit Visa or Mastercards and prepaid credit cards are loaded with your own money, therefore the borrowing of money doesn’t take place and credit cannot be built. If you’re looking to build or rebuild credit, start by getting an everyday or secured credit card.

If you are already establishing positive credit, but tend to be more of a spender, prepaid credit cards work great as a budgeting tool for flexible expenses, as your own money is loaded onto the card and overdraft is not an option. If you have room in your budget and want to receive something other than a good credit score from your card, credit cards with money back or travel rewards can be useful in achieving short term goals like a vacation or a new computer. Though these cards sound appealing, their annual fees and interest rates may be higher. It’s important to do your research, or talk to a financial advisor to see which credit card will work best for you and your budget.

PLAYING IT SAFE

It’s easy to get caught up in a new credit card relationship – especially when hopes of a vacation, money back or a higher credit limit may be involved. However, the risks that are associated with a credit card cannot be forgotten. Playing it safe will not only help boost your credit score, but will help set the tone of your future financial well-being.

How to Practice Safe Credit:

  • Understand how credit cards work. Having this knowledge will give you the upper-hand when deciding how to use your credit card.
  • Pay your credit card charges in full every month before the due date. If you do this, you won’t be charged interest. If you are unable to pay the balance in full – ensure you pay at least the minimum monthly payment by the due date.
  • Try to avoid taking cash advances on your credit card, unless it’s an emergency. Interest starts to be charged from day one for credit card cash advances, and it can add up quickly.
  • Limit the amount you charge on your cards. Never charge more than you can comfortably afford to pay off in full.
  • Keep an eye on what you’re spending with credit cards using online banking, a mobile app or by manually keeping a budget. If you notice your habits changing for the worst, it may be time to reassess your relationship with your cards.

WHEN IS IT TIME TO MAKE THE CUT?

Unfortunately, not all relationships are healthy. Sometimes, financial self-reflection is needed to figure out whether or not it’s time to cut ties and reach out for help. Warning signs of an unhealthy credit card relationship tend to include behaviour such as:

  • Consistently paying only the minimum balance on your card (or not at all).
  • Racking up past due payments.
  • Using one credit card to pay the balance on another.
  • Receiving or ignoring calls and messages from collection agencies.
  • Negatively affecting your credit score because of your relationship with your card(s).

If you’re beginning to worry about how your relationship with credit is affecting your finances, contact us for a free and confidential debt consultation. Our Licensed Insolvency Trustees understand how easy it can be to get caught up in an unhealthy relationship with credit cards, and will work with you to find the best solution for your debt problem.

RobM_HS

 

Rob McLernon is a Licensed Insolvency Trustee (LIT) and a Chartered Insolvency and Restructuring Professional (CIRP) with our Nova Scotia Grant Thornton team. He’s been working primarily in the consumer insolvency area since 2003. In addition to being a LIT, he is a Certified Insolvency Administrator and Counsellor. Rob has extensive background knowledge on debt restructuring and brings this to his current role.

Tackle Your Debt in 2018 Using SMART Goals

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SETTING SMART FINANCIAL GOALS FOR 2018

Now that we’re a few weeks into 2018 and you’re thinking about your goals or resolutions for the year, it’s the perfect time to reflect on where you sit financially and tackle your debt. Perhaps, you have already set out to be more physically fit by signing up for those hot yoga classes, or are tapping into your mental wellness by dedicating five minutes to meditation. While these are all great goals, why not round out 2018 by focusing on improving your financial wellbeing?

With any goal, financial or otherwise, it takes thoughtful planning and organizing to be carried through.  Avoid delays in your achievements by setting SMART goals to keep you focused, organized and on track for success. SMART goals are one of many goal planning tools that can be used to organize and track your financial progress throughout 2018.

SMART goals consist of 5 key components. They must be Specific, Measurable, Achievable, Relevant and Time-Bound. When developing your SMART goals, keep these helpful tips in mind:

1. Be specific about what you want to accomplish. Think about “what” is important to you and why?

2. Make sure the goal is measurable to help track your progress. Assign numbers or percentages to your financial goal, like “paying down $10,000 of debt” or “saving 10% of each paycheque”

3. & 4. Have an achievable and realistic goal. Think about the factors that are outside of your control and how those factors could impact your success.  If the goal isn’t realistic, think about what is achievable and plan from there.

5. Set specific milestones throughout the year to measure your progress.  For example, if your goal is to build an emergency fund, think about how much you want to have saved in 3 months’ time. At the end of each quarter, check-in on to see if you’re meeting your goal..  If you’re on track, great – keep doing what you’re doing. If not, make adjustments to ensure you reach your target at the next check-in point.

To make planning SMART goals easier, check out online goal tracking tools like Goal-Buddy.com.


STAYING FINANCIALLY MOTIVATED IN 2018

Staying motivated to achieve these goals can be difficult, especially when it comes to reducing debt and saving money. It’s easy for anyone to have set backs when it comes to financial planning, as it involves changing habits that can be difficult to break like spending less, learning to budget and putting a stop to using your credit cards.

To help you achieve your 2018 financial goals, our Licensed Insolvency Trustees shared their top tips kii.,/,to staying financially motivated:

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