April 30th is the deadline for your clients to file their tax returns. The following is a top ten list of tax filing tips you can review with your clients to ensure they’re paying the least amount of tax possible.
1. Home Renovations
If there was a year to make home improvements, 2009 was the year. If any your clients undertook renovations on their personal residence between January 27, 2009, and January 31, 2010, they may be eligible for the one-time home renovation tax credit. If clients have spent over $1,000 and up to $10,000 on home renovations, they will receive up to $1,350 of federal tax savings when they file their tax return. The items that qualify generally include any renovations that become a permanent part of the home, such as renovating a kitchen, bathroom or basement, adding a deck, painting, installing flooring or carpets or adding a swimming pool or hot tub. Clients don’t need to submit their receipts, but they need to keep them on file in case CRA comes knocking and asking to see them.
2. Pension Income Splitting
If your clients received pension income that is eligible for the pension income tax credit, they can allocate up to one-half of the pension income to their spouse or common-law partner’s tax return. Pension income that qualifies for this treatment depends on age and type of pension income received. Income from a company pension plan is eligible for pension income splitting regardless of age. However, if your clients are receiving RRIF income or income from a locked in retirement account, the income will be eligible for pension income splitting if your client is over the age of 65. Keep in mind that Old Age Security benefits or CPP retirement benefits are not eligible for pension-income splitting, although the client may apply to HRSDC to have their CPP retirement benefit split with their spouse or common law partner. Pension income splitting makes great sense when the pensioner has a spouse or partner who is in a lower tax bracket. However, it’s best to work with a tax professional to determine the optimal amount of income that should be allocated.
3. Charitable Donations
Charitable donations provide tax savings through a two-stage donation tax credit system. The first $200 provides a federal tax credit of 15% and any donations above $200, attract a tax credit of 29%. There are also provincial tax credits to consider as well, so the total savings will vary by province. Spouses and partners can choose to combine their donations and claim them on one tax return. This is highly recommended since it will maximize your clients’ tax savings by only having to exceed the low rate tax credit once. Keep in mind as well that if your clients have donated any securities or mutual funds to charity, there is a zero percent inclusion rate, so they are free from paying any income tax on the capital gains realized. If investments were donated to charity at a loss, the client is entitled to claim the donation tax credit, as well as the capital loss and hence will receive a double-benefit!
4. First Time Home Buyers Tax Credit
If your clients acquired their first home after January 27, 2009, they are entitled to a first-time homebuyer tax credit; which is a federal tax credit worth $750. In order to qualify for the tax credit, your clients must be considered a first-time homebuyer. This is defined as your client or his or her spouse not having owned or lived in another home in the year of purchase, or in any of the four preceding years. There are less restrictive rules if your client is disabled.
5. Calculate ACB
Your clients realized a capital gain or loss on any investments sold in 2009, depending upon whether the investments increased or decreased in value from their purchase price, or “adjusted cost base” (ACB). To calculate a capital gain/loss for tax purposes, it’s important to determine and know the ACB for these investments. There are many factors which determine your client’s ACB over and above any purchases made. Examples include: Reinvested distributions, return of capital distributions and special tax elections just to name a few. As an advisor, you can help your clients by providing them or their tax preparers with summaries of transactions, statements, and other information to ensure their ACB is accurately calculated, and the correct capital gain/loss is reported.
6. Capital Losses
If your clients triggered any capital losses during 2009, remind them that they should report the losses so that they may be applied against any taxable capital gains during the year. If losses exceed capital gains in 2009, they may carry the losses back to 2008, 2007 or 2006 and apply them against any capital gains reported in those years respectively. Doing so will allow your clients the opportunity to recover taxes already paid in previous years. Losses not applied can also be carried forward indefinitely and used in any future year.
7. Dividends On Spouse’s Return
Dividends can also be combined and claimed on the return of one spouse or partner. This is beneficial where one spouse is the sole income earner, and the other spouse has little to no income. In this case, it may make sense to report all dividend earned by both spouses on the higher income earning spouse’s return. This will increase the spousal amount claimed by the higher income earning spouse and result in larger tax savings. That is, the tax savings from the increased spousal amount will be greater than the taxes that will be owed on the dividends being reported.
8. Returns For Deceased Clients
If your client passed away in 2009, the estate will be required to file a terminal (ie. final) tax return reporting all the income earned from January 1st, 2009 up to the date of death. However, the executor of your deceased client’s estate has the option of filing up to three additional tax returns. Filing more than one tax return results in tax savings, since each tax return is entitled to claim the basic personal amount of $10,320 and benefit from the progressive tax rates. In essence, you are income splitting with yourself multiple times. Additional returns can be filed if the deceased;
- Had amounts owing at the time of death. This is a “rights or things” return
- Was a beneficiary of a testamentary trust whose year end was not December 31st, and;
- Was a business owner or involved in a partnership whose year-end was not December 31st.
9. U.S. Income Tax Filing Obligations
If your client is a U.S. citizen living in Canada, there is still a requirement to file annual U.S. tax returns. While many of these clients ignore the filing obligation because there may be no U.S. taxes owing, it’s important to remind them that failure to file a U.S. tax return may result in penalties for non-compliance. Also, if your clients own an RRSP, they will need to file U.S. form 88-91 with the Internal Revenue Service (IRS) on an annual basis. This ensures that the tax deferred status that your client enjoys in Canada is also applied in the U.S. It also allows your client to defer the U.S. taxation to the future when withdrawals are made from the plan. Since the U.S. does not recognize the tax deferred status of registered plans, failure to file this form means that the IRS could tax any income or growth in value in the RRSP annually.
10. Children’s Tax Return
Parents with children who don’t earn more than the basic personal amount ($10,320 for 2009) generally choose not to file a tax return. However, if the children have some income or have a part-time job, it may be advantageous to file a tax return for the children. It will allow them to recover any income taxes withheld by an employer, or even if there is no income, the children may be entitled to certain provincial credits that will put cash in the children’s pocket. Also, if the children earn some income, filing a tax return will begin accumulating RRSP contribution room, which will be beneficial in the future. If the children are over the age of 18, filing a tax return will also establish Tax Free Savings Account contribution room as well.