If you're a parent, you may be wondering when your children should start filing their own taxes. Even if they're still too young to take this on themselves, every child can benefit from a simple conversation about income, money management and how taxes come into play.
Understanding the basics
If your children are doing chores around the house and getting an allowance for their work, they're gaining a basic understanding of the value of money and financial responsibility. If they happen to have a part-time job, they're also gaining exposure to how wages work in the real world as they're taxed on the income they earn.
As a result, now is the best time to sit down and discuss why we have to pay taxes and involve them in the tax-filing process.
While older children with part-time jobs might be frustrated to learn that they can't keep 100 per cent of their wages, they should understand that everyone pitches in to secure the money we need for everyday essentials.
The schools they attend, the extracurricular activities they take part in, and even the roads they drive down are just some of the many necessities funded by our taxes, and they are, in part, what help make Canada a great place to live.
For children of all ages, it's a good idea to sit down and discuss the importance of budgeting early on. Those who have an appreciation for finances at a young age tend to have better money management skills later in life, so there's no reason to put off this conversation. Even younger children who collect money for chores should learn about spending wisely and saving for the things they need (and want).
Choosing between an RRSP and a TFSA
Parents with children who are ready to file their taxes for the first time should also be prepared to review the differences between contributing to a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA) as a young adult.
An RRSP can be opened as soon as your child has any type of income. Contributing $20 a month to this tax-sheltered account can go a long way, even if they're paying off student loans or if they have a modest starting salary. That said, higher income earners who contribute larger amounts of money to RRSPs are the ones who will truly benefit by receiving a larger tax refund.
It's also good to point out that funds withdrawn from RRSPs later in life -- during retirement, for example -- will be taxed, however your child can use their RRSPs tax free to help with the purchase of their first home. Learn more about that here.
One of the benefits of contributing to a TFSA, which your child can begin doing once they turn 18, is that they won't be taxed on money they decide to withdraw at a later date. While there is an annual contribution limit (currently $5,500), they can withdraw funds from this account at any time without penalty.
For those who are currently earning a lower income or who expect to earn more money later in their careers, a TFSA contribution stands to provide a better payoff. The temptation, however, to spend your savings when you need a few extra dollars can be too great to resist, and can potentially leave your children with a smaller safety net down the line. TFSAs are a great option for young filers, but they require some discipline if they want to truly reap the benefits.
Leveraging your resources
Though you may have been filing your own taxes for decades, it's still helpful to have a few tips and resources at your fingertips when diving into this conversation with your children. For example, the CRA offers an online Learning about Taxes course, designed for anyone who wants to learn about Canada's tax system and how to file a simple return, which you can complete together in 60 to 90 minutes.
The TurboTax Canada blog also offers helpful information, including what's new for the current tax year, tax credits that can be claimed and tips for how to save. Further, how you're able to file has also come a long way.
Tech-savvy children might be more inclined to file on their own if they know they can do it for free while on the go. TurboTax Free is a great option for an effortless first-time filing experience. With an intuitive design, simple instructions and Auto-Fill My Return automatically transferring their data from the CRA, they'll find this new responsibility easy to master.
Keeping the conversation going
If your child receives a tax refund, it's a good opportunity to revisit the financial management discussion. It's important that they understand that this isn't "free money," and that this reimbursement from the government can be used to pay off priority debts, such as student loans, or to invest in themselves.
It's best to begin saving for the future now, rather than spending their refund on items they otherwise couldn't afford.
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