Taxes and Debt

[Anonymous]

We currently owe approx $6000 to the tax man since dh kinda works for himself.

We also have a line of credit that we would like to pay off as quick as possible.

3 Q's:

1) Should we pay the CRA off 1st and as quickly as possible, and then concentrate on the LOC?

2) How much should we be setting aside per pay cheque? I'll use easy #'s eg: say dh brings home $1000 cheque, should we deduct 30% for income tax bringing pay to $700, then deduct 13% ($130) for HST bringing us down to $570?

3) What is the interest rate that they charge past due taxes? IT & HST?

Thank you

[strongmommy]

Hi ANON,

CRA charges approx. 5% interest on late payments for both income tax and HST (plus the 5% penalty on the balances due that weren't paid as of April 30th, 2012 for the 2011 tax year). If you have a LOC that offers a lower rate than that then it makes sense (from a math perspective) to pay off CRA first.

In terms of setting aside cash for next year .... if this is the first year he's owed more than $3000K then he isn't yet required to pay installments and so CRA won't tell him how much to send in every 3 months for next year's balance. It's impossible to say really without knowing what his net taxable income is ... 30% would be on the high side. A good starting point would be to assume he'll owe the same amount next year because his income and expenses won't change HUGE and put that aside over the next 12 months.

I assume he's an annual filer for HST and isn't making installment payments for this yet either ... so you could do the same thing.

The best approach would be to track each month (and set up so you can see the year to date amounts) what his income and expenses are. This makes it pretty easy to see at a glance where he's at for HST (sales less the ITC's) and gives you a good picture of where his income is heading for the year.

Feel free to ask away any other questions .... I have lots of internet catching up to do and will be around a bit more this evening.

thanks

[Anonymous]

I feel like we are digging ourselves into this huge hole, and can't get out.

It seems like we can't get ahead, bc when dh gets paid we are already in the hole with the $ and haven't paid any back.

i am a terrible book keeper and I feel like this is my fault. Do you have any tips as to what I should be doing on a weekly/monthly basis?

Dh does a job and just gets a cheque from the company with no deductions at all. I look at his paperwork once a year at tax time and I haven't even looked at it this year. We haven't filed our 2011 taxes, so we probably owe more like $12 000 in just IT, not even including HST.

I'm starting to freak out a little bit with all this. Thanks for the help.

[strongmommy]

Hi again Anon,

OK - another apology for such a long delay in replying. I suspect I'll be in and out less frequently as my computer keeps having to move around due to some work on our house ... so please be patient if you have more questions!

Don't beat yourself up over this. Really, it's your hubby's income and something he should also be on top of so don't own it yourself! Not staying ahead of the bookkeeping is not at all uncommon in my experience ... although I should say it's not the best strategy to ignore and deal with only once per year.

I'm making assumptions since you mention a company and a cheque but no deductions. Is your DH paid by commission? Considered self employed by the company? I'm wondering why he needs to account for HST if it's not HIS business and customers aren't paying him directly??

Do you do your taxes yourself or do you have someone (like H/R or an accounting firm) do them?

Tracking the income and expenses is something you need to do ONLY to figure out what you need to include on his income tax return (I assume you don't need fancy statements or anything). So tracking it can be accomplished any way you want so long as you know at the end of the year the total GROSS income and the total expenses.

My suggestion would be setting up some type of spreadsheet or workbook -- for each month or for say 3 months combined. Add up all the cheques (gross income) and keep track of all the expenses associated with earning this income (mileage/car expenses/inventory/supplies/paper/postage and shipping/office type stuff/professional insurance/cell and phone costs etc). If he's self employed you should also be claiming a deduction for home office costs. Keep the receipts to support these expenses in some type of order (even baggies or pouches for each type of expense). Tracking this info is for YOUR purposes so don't be discouraged or avoid it simply because you don't have time at the moment to sort every receipt by date. Throw them all in your baggies/pouches etc and worry about making it pretty only if CRA asks to see them.

Take a breath and plow through it ... start with little chunks if necessary and get yourself organized to put it all together.

Hope this helps - even a bit.

thanks