Accurate Books and Records
Tax Tips By Protax Canada Inc.
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:
I speak to hundreds of clients every year who are chronically behind in filing their tax returns.
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 2001.
Don't think there are 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.
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.
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.
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.
Owning a home is a cornerstone of wealth for Canadians and about 60 per cent of alDid 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.
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 installment 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.
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.
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.
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.
Accurate Books and Records
TUITION FEES AND EDUCATION CREDITS
Full-time students may claim a federal credit of 15 per cent of their eligible tuition fees, plus an education credit of 15 per cent of $400 per month in 2011. The equivalent Ontario provincial credit is indexed; students may claim a monthly credit of up to 5.05 per cent of $490 (the indexed amount is determined annually and can be found on the Ontario TD1 form).
Students registered to attend part-time studies may also claim the tuition fee credit of 15 per cent of eligible fees; in addition, they may deduct $120 a month toward the 15 per cent federal education tax credit, and $147 per month (indexed) toward the Ontario provincial education tax credit.
Students with disabilities may be enrolled part-time to qualify for a full-time credit. Individuals with disabilities who are enrolled in approved Human Resources and Skills Development Canada (HRSDC) or equivalent provincial/ territorial-approved training programs can also deduct those related expenses.
The education tax credit also applies to students who are pursuing career-related, post-secondary education at their own expense (e.g., the CGA program of professional studies). OTHER TAX CREDITS AND EXEMPTIONS.
There is a non-refundable "textbook tax credit" of 15 per cent of $65 to cover each month the student is eligible to receive the full-time education tax credit and 15 per cent of $20 for each month they are eligible for a part-time education tax credit.
Scholarships, Fellowships and Bursary Income All scholarship, fellowship or bursary income with respect to post-secondary education or occupational training in a program, one that entitles the student to claim the education tax credit, are fully exempt from taxation.
It is not always necessary for a student to be in physical attendance at a qualified institution in Canada to claim either the tuition or education tax credits. For example, online course participation via the website of a recognized post-secondary institution may also qualify the taxpayer for both tax credits.
Unused Tuition, Education and Textbook Credits Unused tuition, education and textbook credits may be carried forward indefinitely to offset the income of students in future years. Alternatively, students may transfer unused federal credits of up to $5,000 (an indexed $6,295 for the Ontario portion of this credit), reduced by their income in excess of personal credits, to a supporting person — such as a parent or grandparent. However, the transferred credits must be claimed in the year they were incurred. Students who are attending an accredited institution outside Canada — generally this will translate to a university-level course of at least 13 consecutive weeks duration leading to a degree — are eligible to transfer their unused credits, provided they owe Canadian income tax. However, students who reside in Canada near the U.S. border who are registered in (and commute to) a designated educational institution in the U.S., might be able to claim or transfer a tuition credit for a course of any duration.
There are some mandatory ancillary charges — such as fees for computer services, labs, health and athletics — that are also eligible for the tuition credit. Mandatory computer-service fees eligible for a tuition credit could include such things as the use of a laptop computer and applicable software. The Canada Revenue Agency (CRA) has ruled that students may deduct tuition fees paid to an accredited post-secondary institution for audit/hearer courses in which they attend lectures, but do not write examinations or receive credit.
A 15 per cent federal tax credit and a 5.05 per cent Ontario provincial tax credit are available on the repayment of interest on federally or provincially approved student loans. To be eligible for this credit, students must consolidate their loans with an authorized lender after graduating from the post-secondary institution and assume responsibility for paying interest by the first day of the seventh month, following completion of their studies.
Students have the option of applying the non-transferable credit to either the current year or to carry it forward to any one of, or spread over, the next five subsequent taxation years.
Even students who didn't earn enough money to necessitate paying income tax should file an income tax return. The rationale for this is because 18 per cent of earned income from the previous year is eligible to be contributed to an RRSP. Students don't have to deduct an RRSP contribution in the year in which it was made; instead, they can carry it forward for deduction in a future period when they have sufficient income with which to offset the RRSP contribution.
Taxpayers are able to withdraw money from their RRSP for qualifying full-time education and training for either themselves or their spouse/common-law partner — but not both parties at the same time — on a tax-free basis. For individuals with disabilities, this provision, which is known as the Lifelong Learning Plan (LLP), covers both full- or part-time education and training.
LLP withdrawals may not exceed $10,000 in a year and $20,000 over a four-year period. Taxpayers can participate in the plan as many times as they wish but may not begin a new plan before the end of the year in which all repayments are made for previous withdrawals. Withdrawals are generally repayable in equal instalments over 10 years, beginning about five years after the first withdrawal (sooner if the student fails to remain in the program full time).
Students in medical residency programs that last for at least three months and qualify for the tuition fee tax credit may also participate in the LLP.
Many lower-income earners, including students, may be eligible for a GST credit. If so, don't forget to apply for the GST rebate on the tax return. Check with a certified general accountant to determine how the tax credits detailed here apply to your specific situation.
Do More with Your Student Dollars Tax Tips for Post-Secondary Students in Ontario
Parents who spend at least 12 hours per month studying in an educational program lasting at least three consecutive weeks at a secondary school, college, university or other designated educational institution, are eligible to claim expenses incurred for child care expenses while they or their spouse/common-law partner attend certain schools.
Students that were in full-time attendance at a post-secondary educational instution in Canada, and who moved at least 40 kilometers within Canada for employment purposes, may claim moving expenses against income earned from a full- or part-time job (including a summer job) the year the move took place or the following year. This also applies the year after graduation.
Eligible moving expenses include items such as:
Students who are 16 years of age or older and living on their own or with friends might be eligible to claim their portion of the rent towards their Ontario property tax credit. A student living in a residence affiliated with a university, college, or nursing school, might also be able to claim an occupancy cost of $25 on their tax returns for that portion of the year in which they lived in residence.
The federal government offers a non-refundable tax credit for taxpayers who purchase transit passes generally totaling at least one month's duration for various modes of transportation (e.g., a local bus, streetcar, subway or commuter train). Students should save their passes and obtain receipts in case they are requested by CRA.
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: