How To Save Tax in Canada

In April of each and every year the majority of Canadians collectively experience angst and stress as they complete the ritual of filing their income tax returns.  Some, I have been told, get violently ill while others get violently angry.  Some go into the ritual well prepared, some so well prepared they do their returns themselves.  Others agonize while they try and locate every tax form, receipts for eligible expenses, and, even when finding all of these, they rely on the services of trained professionals to assist them in this necessary but unpleasant task.

Generally, there are two ways to reduce the taxes that we pay in Canada. First of all, practice good financial planning to ensure that all legitimate means of reducing income are used for the income tax year in question.  Secondly, make sure you properly complete and file your income tax return and that all your eligible deductions are used on your T1 form.

REDUCING YOUR TAXABLE INCOME 

The following is a list of some of the more common methods and vehicles used in reducing your taxable income:

• Registered Retirement Savings Plans. Assuming you are not a member of a company sponsored pension plan, you can contribute up to 18% of your previous year’s net income to a maximum of $23,820 for the 2013 tax year.  This amount can be increased by any unused RRSP contribution room from previous years.  Your 2012 Notice of Assessment will tell you what your carry-forward room is for 2013.  If you spouse is not employed, or earns less income, consider making a Spousal RRSP contribution.  Your tax deduction limit will remain the same, but future withdrawals, which are taxable as earned income, will be taxed at a lower rate.   http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html 

• Tax Free Savings Accounts.  TFSA’s were introduced by the Federal Government in 2009 and allow Canadian residents who are 18 years of age or older and who possess a valid Social Insurance Number to set aside money tax-free during their lifetime.  Although contributions are not tax deductible, $5,000 per year may be invested with the earnings accumulating free of income tax.  Funds can be withdrawn at any time without tax.  If you have not contributed in past years the unused contribution room can be used. For example, if you have never contributed to a TFSA you maximum contribution for 2013 tax year is $25,500.  http://www.cra-arc.gc.ca/tx/rgstrd/tfsa-celi/menu-eng.html 

• Registered Educational Savings Plans.  If you are saving for your children’s post-secondary education, you should investigate an RESP.  Contributions are not tax-deductible but the funds grow tax free while they remain in the plan.  In addition, contributions are eligible for the Canada Savings Education Grant which is credited at a rate of 20% of the contribution to a maximum of $500 per year and a lifetime maximum of $7,200.  While there is no longer an annual contribution limit, the lifetime maximum contribution is $50,000.  Certain eligible children are also entitled to additional grants through provincial incentive programs and the Canada Learning Bond program.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html 

• Splitting Pension Income.  Since 2007, Canadian residents have the opportunity to split 50% of their eligible pension income with their spouse or common-law partner who is also a Canadian resident. Eligible pension income includes regular payments received from a Registered Pension Plan and, if you are 65 years or older, income received from a Registered Income Fund or an RSP annuity.  Payments not eligible include OAS, CPP/QPP and non-annuitized withdrawals from an RRSP.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html 

• Income Splitting.  If you are in a position to do so, investigate hiring your spouse or children to perform legitimate employment tasks. 

• Tax Efficient Investment Strategies.  If you have contributed the maximum to your RRSP and TFSA, investigate using more tax efficient methods of investing.  For example, dividends are taxed, depending on your province of residence at a rate of approximately 32%. Capital Gains are taxed at an effective rate of approximately 22%.  In fact, consider investing for these types of gains outside of your RRSP (as all withdrawals from RRSP’s are taxed as income) and using highly taxed vehicles such as bonds and GIC;s for your RRSP investments.  Also investigate certain life insurance products whose cash values accumulate free of tax (until withdrawal during your lifetime, but are tax free at death) under Section 148 of the Income Tax Act. 

• Practise Philanthropy.  Contributions made to registered charities are eligible for a non-refundable income tax credit for up to 75% of your net income (in year of death that is increased to 100%).  http://www.cra-arc.gc.ca/charities/ 

While the above is not an exhaustive list of all the income reducing strategies, these are the most common.

MAKE SURE YOU GET ALL YOUR ELIGIBLE DEDUCTIONS 

After practicing good financial planning and utilizing the information above, it would be a real shame if you missed some of the deductions for which you are eligible when you file your return.  Again, this is not an exhaustive list but itemize those that you should be aware of:

• Business Related Expenses.  To quote the Canada Revenue Agency, “As a rule, you can deduct any reasonable current expense you paid or will have to pay to earn business income.”  This includes automobile, entertainment and home office expenses.  It is important, however, to acquaint yourself with the rules so as not to risk a reassessment or, heaven forbid, an audit.  For example, only 50% of the cost of business meals and entertainment is deductible.   http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/bsnssxpnss/menu-eng.html 

• Child Care Expenses.  Generally, the maximum that may be claimed is $7,000 per child depending on the child’s age and is claimed by the lower income parent and subject to taxpayer’s income etc.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/214/menu-eng.html?=slnk 

• Interest Expense.  If you have borrowed money that is used for business or investment purposes, the interest that is paid on that loan may be tax deductible.   http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.html 

• Trades-peoples Tool Expense.  If you are an employed tradesperson you can deduct up to $500 for the cost of eligible new tools which cost more than $1,095. 

• Political Contributions.  A graduated tax credit is available for eligible political contributions made in the year.  The maximum credit allowed is $650 pear year.  It should be noted that as your contributions increase your tax credit decreases. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns409-485/409-410-eng.html 

• Medical Expenses.  While you cannot claim for any medical or dental expenses for which you were or may be reimbursed, a Federal Tax Credit is available for medical expenses which exceed the lesser of $2,109 and 3% of your net income for 2012.  Medical expenses include premiums paid to Private Health Plans and for supplementary coverage while outside of Canada.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/menu-eng.html 

• Pension Income Amount.  You may be eligible to claim a credit for up to $2,000 of qualifying pension or annuity income.  This does not apply to CPP or OAS. Generally it applies to pension income for those aged 65 or over from lifetime annuity payments under a Registered Pension Plan, matured RRSP’s and payments from a RRIF.  If you are an employee aged 55 and older and are receiving pension income you are also eligible for the credit.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/314/menu-eng.html 

• Education and Tuition.  Amounts paid for tuition and text books relating to an  invididual’s enrollment at a post secondary educational institution are eligible to receive tax credits.  These tax credits can be transferred to a parent, grandparent, or spouse to a total maximum of $5,000.  Proper tax documentation provided by the educational institution is required (T2202A).   http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/324-eng.html 

• Family Caregiver Tax Credit.   New in 2012, if you care for a dependent with a mental or physical infirmity you can claim an amount of $2,000 which is eligible for tax credit treatment. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/fmlcrgvr-eng.html 

• Public Transit Pass.  You can claim the cost of public transit passes for monthly or longer durations for public transit in Canada.  It can be claimed by you for yourself, your spouse or dependent children under the age of 19.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/364/menu-eng.html 

• Children’s Fitness and Arts Programs.  An amount of up to $500 both Fitness and Arts programs (total $1,000) may be claimed for any child aged 16 or younger.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/370/menu-eng.html 

• First Time Home Buyers.    If you or your spouse is acquiring a home for the first time you may be eligible to claim a $5,000 deduction.  In order to qualify for this deduction you cannot have lived in a home owned by you or your spouse in the year of purchase or any of the preceding four years.  http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/369/menu-eng.html 

Of course, there may be other deductions for which you are eligible for.  The important thing is to fully acquaint yourself for the rules regarding each of those that you are entitled to. The website of the Canada Revenue Agency is a great resource and, where available, I have provided links as shown.  I would also recommend you use a qualified professional to assist you in completing your return. If you use tax preparation computer software ensure you are using the most current edition.

In completing your return it is important to include ALL your income. The penalties you can incur if the CRA discovers you have missed a T4 or two, or concludes that you are purposely hiding income can be quite severe.   Good luck with your return and if I can be of any assistance please call me.