Near the end of her February reading week, my partner’s 19-year-old daughter asked what she should do with her T4. Never one to miss an opportunity to talk about money, I suggested we file her tax return.
For young people, especially students, filing a tax return is quite simple. Students might have some employment income, and/or income from Registered Education Savings Plan (RESP) withdrawals. Plus, they can claim some tax credits, including moving expenses and tuition. They probably won’t owe any tax if their income was low – but that’s not the point.
Showing your young adult kids how to file a return helps to demystify taxes, set up a good financial habit and teach them ways to reduce taxes down the road. At the very least, it’s a chance to introduce financial concepts that will help them as they launch into adulthood.
Here are three non-tax related benefits to helping your young adult file a tax return.
Demystifying the system
Showing a first-timer how to file a tax return means they are more likely to stay on top of their tax filings down the road. This is hugely beneficial, since it will help them avoid penalties and allow them to take advantage of government benefits and tax credits.
Also, by understanding how income is taxed, they will be in a good position to use savings vehicles such as a Tax-Free Savings Account, Registered Retirement Savings Plan and First Home Savings Account to reduce their taxes later in life when their earnings are higher.
Reviewing their T4 is a perfect way to start the conversation. It shows their income, how much tax they paid and what their government deductions were. Even if this clip is all you cover, your child will have already learned a lot of useful information while filing their first tax return.
Lesson No. 1 is explaining how income tax is calculated and deducted. Tell them about Canada’s graduated tax system so they understand how much tax they can expect to pay when they start working full-time. Introduce the concept of tax planning.
The T4 also shows Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions. Your young adult may not like seeing the money come off their paycheque, but explaining that this is a way of saving for their future can help them feel better about it. Employment insurance (EI) is another box on the slip; let them know these premiums give them a bit of a safety net if they are laid off from a job.
Introducing the TFSA and RRSP
Now that you’ve explained how much Canadians pay in taxes, you can hit them with a “but wait!” moment: how they can lower their income taxes. A TFSA is likely to be the first tax-advantaged account your child will open. They can have their own account starting at age 18.
By contributing to a TFSA, they can generate investment income they will never have to put on their tax return. Tax-free money for doing nothing? They’ll like that idea. So why not open one with them while you have their time and attention?
While investing in an RRSP might still be a few years away, introducing the concept will put the idea on their radar for when they get a full-time job and start earning an income. They will at the very least know that they should ask the question about RRSPs when the time comes.
If you’re feeling particularly confident, you can also dive into the FHSA, which is likely even less applicable to them right now but could be relevant in a few years.
Access to My Account and My Service Canada
Having them sign up for My Account with the Canada Revenue Agency will get your child access to information about their tax returns, benefits and contribution limits on RRSPs, TFSAs and FHSAs. This will make it easier for them to track what they owe, make payments and find prior tax assessments. While you’re at it, they should also create a My Service Canada Account, where they can find information on matters such as CPP contributions and records of employment.
Of course, not every parent is an expert in all of these areas. If you don’t feel equipped to explain everything, that’s okay. Even if you don’t have all the information, raising the topics will help your young adult know what questions to ask and what to spend time learning about. You may even find, as I did, that filing a tax return with your child is the best use of a Sunday afternoon.
Anita Bruinsma is a Toronto-based financial coach and a parent of two teenage boys. You can find her at Clarity Personal Finance.
