With the April 30 tax filing deadline fast approaching, it’s number-crunching time for many Canadians — many of whom might appreciate some money-saving measures.
“It’s not high finance,” says Stuart Dollar, Sun Life Financial’s Director of Tax and Insurance Planning, of the opportunity to help your clients lower their tax bills. “It’s about awareness — knowing more about expenses that qualify for deductions and tax credits — and good planning.”
Dollar cites the Canada Revenue Agency’s (CRA) General Income Tax and Benefit Guide as an excellent resource for you and your clients, and weighs in on 6 tax-savvy tips.
#1: Make the most of deductions and credits
The CRA’s General Income Tax and Benefit Guide offers a line-by-line list of deductions and credits Canadians can claim on their tax returns. Some are well used, others less so, as Dollar explains.
Medical expenses – “Many people don’t know that health insurance premiums may qualify as medical expenses for the medical expense tax credit. That includes premiums you pay for personally-owned policies, or for coverage through work. The same goes for deductibles, co-payments and medical expenses not covered by your plan — any part of a medical expense you have to pay may qualify as a medical expense. It’s definitely worth checking out.”
Credits for seniors – “Many tax benefits are available specifically for people age 65 and up. Senior couples can split eligible pension income and Canada Pension Plan income. Individual seniors can claim the pension income tax credit against their eligible pension income, and can claim the age credit. Many of the costs for therapies and treatments associated with aging may also count as medical expenses.”
Tax deductions versus tax credits – what’s the difference?
Tax deductions and tax credits reduce your income tax liability, but in different ways.
A tax deduction reduces taxable income.
- Among the most common deductions are registered retirement savings plan (RRSP) contributions. For example, if you earned $70,000 in taxable income, and contributed $5,000 to your RRSP, you’d reduce your taxable income to $65,000. The amount saved depends on your marginal tax rate. That’s the rate of tax you pay on your last dollar of income. If you’re in the top tax bracket, you save more than if you’re in one of the lower tax brackets.
A tax credit directly reduces the amount of tax you owe.
- Tax credits are offered at the same rate — 15% federally and at the lowest tax rate applicable in your province. As a result, they provide the same tax relief for all taxpayers who use them, regardless of their tax bracket. For example, for 2014, all Canadian individual taxpayers can claim a basic personal amount of $11,138. The basic personal amount reduces your federal tax bill by $1,671, and also reduces your provincial tax bill, depending on the lowest tax rate in effect in your province.
There are two types of tax credits:
Non-refundable tax credits – These credits reduce the tax you would otherwise owe, but not below zero. Examples include the basic personal amount, the medical expense tax credit, the charitable donation tax credit, the disability amount and the caregiver amount. ‘Non-refundable’ means that the credits can only be used to reduce your tax bill to zero. Even if the total of these credits exceeds the tax you owe, you won’t receive a refund for the difference.
Refundable tax credits – The government will pay you the refundable tax credits you qualify for, whether you owe tax or not. To claim them, you must file a tax return. Examples include the child tax benefit, the GST/HST credit and the working income tax benefit.
#2: Get those receipts
For clients who are eligible for a deduction or credit but don’t have a receipt, Dollar’s advice is simple: just ask.
“Many businesses will reproduce receipts and statements if you ask. The clerk who requests your telephone number and address at the check-out enters that information into a computer system. From there, they track your purchases. Any loyalty program you sign up for does the same thing. Businesses keep records and can easily generate a proof of payment.”
And the CRA tends to be quite generous in what they accept as proof of payment.
“Consider the credit for public transit. You can support your claim with cancelled cheques, credit card receipts, cash receipts and even the pass itself if the information the CRA needs is on the pass.”
#3: Pool receipts
For some tax credits, it doesn’t matter which spouse paid the expense. Either spouse (married or common-law) can claim the credit using both spouses’ receipts. Having one spouse claim the credit using both spouses’ receipts can save the couple more money than if they claim the credit separately.
Charitable donations – “Pooling receipts makes a lot of sense with charitable donations,” says Dollar. “The first $200 of charitable donations qualifies for a tax credit at the lowest tax rate. But donations above $200 qualify for a credit at the top tax rate. If both spouses report their donations separately, they’ll need $400 in donation receipts before their additional donations qualify for a tax credit at the top rate. But if they pool their donations, they’ll only need $200.”
Medical expenses – “If both spouses work, it often makes sense for the lower income spouse to claim the medical expense tax credit. That spouse can pool all the family’s medical expenses, regardless of who paid the expense. It’s a particularly useful strategy because you can only claim the credit for medical expenses exceeding a certain threshold.”
For 2014, that threshold is the lesser of 3% of net income or $2,171 (the net income threshold is $72,366.67). If both spouses’ net incomes exceed $72,366.67, it won’t matter who claims the credit. But if one spouse’s income falls below that level (or if both do), the 3% threshold will be lower – and more of the family’s medical expenses will qualify for the credit. Different rules apply to residents of Quebec.
#4: Know what’s NOT taxable
When tax planning for the future, knowing what’s not taxable can be just as important as knowing what is taxable. Examples of non-taxable income include:
- life insurance proceeds,
- most amounts received from tax-free savings accounts,
- most inheritances and gifts, and
- lottery winnings.
“The CRA clearly identifies items that aren’t taxed,” says Dollar.
Did you know?
- Money received from a life insurance policy when the life insured dies isn’t taxable. However, if you cash in a life insurance policy, it’s taxable.
- Lottery winnings and most inheritances aren’t taxable. However, the interest earned when you invest lottery winnings or an inheritance is taxable.
#5: Recognize the rules – here and abroad
For long duration visitors to Canada, Dollar offers this insight.
“Canada’s immigration rules have changed to accommodate long term visits of up to 2 years in duration. It’s in response to the wishes of Canadian immigrants who are starting families here. Often their parents want to help when a new addition to the family arrives. Unfortunately, our income tax laws haven’t changed. Anyone who stays in Canada more than 6 months has to file a tax return and pay tax on their world-wide income. If they’re still subject to tax in their own country, they’ll have to file two tax returns. They may even end up owing taxes to two governments on the same income. That’s double taxation. Canada has tax treaties with many countries, and those treaties can help reduce the risk of double taxation. But it’s still important for people visiting Canada on a long term basis to check with a tax advisor here and in their home country.”
#6: File on time!
“Most people know that if they owe money and file late they’ll pay interest and penalties,” says Dollar. “But some people think it’s okay to file late if they don’t owe any tax, or if the government owes them a refund. Technically that’s true, but the penalty is that you don’t get your refund until you file your return. And there are some government benefits that can’t be paid unless you file a tax return.”
The bottom line? File your return on time. Even if you can’t pay your full balance owing on or before April 30, 2015, you can avoid the late-filing penalty.
Tax breaks are for everyone
Concludes Dollar: “Tax breaks aren’t just for high income earners or the wealthy — they’re for everyone. And the government expects you to take advantage of them. It’s important to stay informed about what items you can claim for a deduction or credit, and the receipts and documents you need to substantiate your claim. Encourage your clients to learn more or talk with a tax expert.”