Every year millions of Canadians pay more tax than they should. They either don’t file their returns to their family’s best advantage or they leave valuable credits and deductions on the table. Even worse, they don’t file at all and face unnecessary penalties.
Here are some ways to make sure the tax system works to your advantage:
1. File as a family. When it comes to getting the best return for your family unit, it is important to file all returns together. There are three simple steps:
• Prepare each return separately and to the individual’s best tax benefit, starting with the lowest income earner and working your way up to the highest.
• Next look at each return from a family, rather than individual, viewpoint.
• Tweak the returns, to claim the best tax results for the family unit as a whole.
2. File on time. One reason is that people think they owe money and can’t pay. They have heard about fines and even jail for tax delinquents and so simply hope the problem will go away. That just compounds it. The best solution is to file on time, avoid penalties and ask for a payment plan to clear up your tax debt.
It’s possible the tax man owes you! It’s your legal right to prepare your return to your family’s best tax benefit by digging for every tax deduction and credit you are entitled to. Discuss prior filed returns with your tax advisor. Errors or omissions can bring additional tax refunds to your door—claim them all the way back to 2002.
3. Don’t miss employment deductions. Don’t think there’s no tax reductions for you. If you get a T4 slip, and are required to pay out-of-pocket expenses, a deduction may be possible on your tax return.
Here’s the catch: you must be required to pay your own expenses under your contract of employment and the employer must certify this.
Once the paperwork is in place, the tax savings on these deductions can be quite lucrative. They can include accounting and legal fees, motor vehicle expenses, travel costs, parking, supplies used up directly in your work (like stationery, or maps), office rent or certain home office expenses as well as amounts paid to an assistant, which could be a family member
4. Buy a house. Owning a home is a cornerstone of wealth for Canadians and about 60 per cent of all Canadians do. Half of those homeowners have paid off their mortgage, freeing up cash flow, particularly in retirement.
Another reason why home ownership is so attractive is that the increase in value of a property designated as a principal residence is tax exempt.
It’s easy to qualify for tax exempt gains, later when you sell for your home. All you need to do is to live in the property at some time in every year in which it is declared to be your “principal residence”. That can mean a weekend, two weeks, two months—it’s up to you.
A principal residence could be a house, a cottage, a mobile home, a condo, or a recreation property like a condo in Florida, a cottage on the Lake of the Woods, or a ski chalet in Whistler.
5. Use your RRSP to save for a house. The Home Buyers’ Plan allows first time home buyers to withdraw up to $25,000 from their RRSP tax-free, for the purpose of buying or building a home.
The withdrawals may be a single amount or the taxpayer may make a series of withdrawals throughout the year as long as the total does not exceed the $25,000 maximum.
Tax-free withdrawals from an RRSP may also be made to do home renovations to meet the needs of a disabled person. You don’t even have to use the funds borrowed from your RRSP in any specific way: you only have to show that you did buy or build a qualifying home. That means you can buy furniture or take a vacation after all the renos, too!
But there is one small catch: the funds withdrawn must be repaid to the RRSP, over a maximum 15 year period. If you don’t, amounts not repaid must be included in your income in the year due. Discuss this with your advisors.
6. Minimize tax on severance payments. A severance package can provide for a soft landing but it can also temporarily put you into a high tax bracket. Severance is usually paid in a lump sum, but may be paid periodically. Worse, they are usually fully taxable, unless some of your service occurred before 1996.
One good way to reduce your taxes is to maximize your RRSP contribution room. Another is to write off your legal fees paid to fight a wrongful dismissal. In dispute cases, lump sum averaging may also be possible. See your tax advisor before you agree to take the money, to ensure you keep as much as possible, after-tax.
7. Control credit crunches. Did you lose a job or business or a large part of your investment portfolio in recent months? You might find yourself sitting on an investment loan, margin account or mortgage that was affordable a few months ago, but no longer is.
It’s a good idea, when you’re in a credit crunch, to look to the tax system to help you create new money fast. Find out first if your tax withholdings at source can be reduced as a result of your RRSP contributions or significant medical expenses.
Make sure you take advantage of losses to reduce income. And get your investment priorities right: Don’t cash in RRSPs if you can help it—this will cause a tax problem next year. Be sure to see a financial and tax advisor for help with your planning.
8. Reduce tax installment payments. Some people pay income taxes by making quarterly payments. This includes those who are self-employed or other sums from which tax is not withheld at source.
When you fall into an instalment payment profile, you will start receiving a regular billing notice from Canada Revenue Agency reminding you to pay those on time. Trouble is, if your income has dropped since you last filed a tax return—and that’s quite possible given recent financial turmoil -CRA will not know to reduce your payments.
Good news: reducing your quarterly instalments is easy! Simply write a letter to request a revised billing based on your estimated income for the current year. This is a much better way to manage your cash flow and stay invested during market turmoil.
9. Pension income splitting. If you received a pension from your company plan or started periodic withdrawals from your RRSP or RRIF this year, then you should explore whether you and your spouse qualify for pension income splitting.
You may be able to transfer up to 50 per cent of your pension benefits to your spuse to reduce taxes. There is a catch- an age limit for some. Those with benefits from employer sponsored plans can take advantage of pension income splitting at any age; others with periodic income from RRSPs, RRIFs or other annuities, generally have to wait to age 65 to income split.
If you took early retirement in any year since 2007, check out opportunities to split income with your spouse—it can put thousands of dollars back into your pockets.
10 Set up a TFSA. The TFSA is a registered account in which investment earnings, including interest, dividends and capital gains are tax exempt. Its benefits are therefore as clear as its name: you earn the income tax free.
Investors must be 18 to contribute up to a maximum of $5,000 and they must have “TFSA contribution room.” Your TFSA contribution room may be carried forward to future years, if you can’t afford to contribute now. Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction.
There is no other age or income barrier, which means you can contribute annually for the rest of your life. This makes the TFSA a great option for further tax sheltering if you are an RRSP-ineligible investor. It’s really worth it to check out this investment for every adult in your family.
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