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How to reduce your Canadian tax bill

Tax season is about to come to an end and those of you who are yet to file taxes may be scrambling to get your papers in order before the deadline of April 30.

Don’t procrastinate. However, before you file, take the time to look through these tips provided by the Institute of Chartered Accountants of Ontario. They may help you reduce your tax bill. They may even land you a refund!

Access your tax information online

Stop waiting for the mail! You can now review your tax accounts online. “The Canada Revenue Agency (CRA) has electronic services that allow individuals to access their tax and other financial information online,” explains chartered accountant Sam Zuk, Partner with Soberman LLP, Toronto.

“My Account lets you to review all kinds of information, including your tax returns and carryover amounts, Registered Retirement Savings Plan (RRSP) deduction limit, information on the status of your Home Buyers’ Plan and Lifelong Learning Plan, Tax-Free Savings Account (TFSA), installments, disability tax credit and benefit payments.”

You can also manage your personal income tax and benefit accounts online.

“My Business Account offers similar services for businesses,” Zuk adds.

For further information and to apply for an account, visit the CRA website at www.cra-arc.gc.ca/menu-eng.html and click on My Account or My Business Account.

Claim tuition fees and more

Are you thinking of returning to school now that you’ve retired? Or do you have a student pursuing post-secondary studies in your family? 

“You can claim a tax credit for tuition and related expenses, including library, lab and computer fees paid during the school year,” says chartered accountant Gary Katz, Partner, Logan Katz Chartered Accountants in Ottawa. “Full-time students can also claim an education amount of $400 federally ($490 for Ontario taxes) per month, and part-time students can claim $120 ($147 for Ontario taxes) per month for each full- or part-month in attendance.”

Is a family member helping you financially? Up to $5,000 of education, tuition and textbook amounts for federal tax purposes, or up to $6,295 for Ontario tax purposes can be transferred to a supporting spouse, parent or grandparent. Any remaining unused amounts can be carried forward and claimed by the student in a subsequent year.

“While books, student fees, parking and equipment can’t be deducted,” says Katz, “a federal textbook credit of $65 per month can be claimed by full-time students, and $20 can be claimed by part-time students who are eligible for the education tax credit.”

Other potential tax-savings include a tax credit or a deduction for interest on student loans, child-care expenses, transit passes, rent/accommodations and moving expenses.

Starting in 2012, students could be eligible for a new 30 per cent Off Ontario Tuition grant. Check www.ontario.ca to see if you qualify.

Tax credits for caregivers

They call it the Sandwich Generation – those adults in their middle years who find themselves caring for ageing parents as well as growing children. And the pressures – including the financial ones – can be even greater when those being cared for have physical or mental challenges.

“You may be eligible to claim a tax credit for the caregiver amount if – either alone or with another person – you maintained a home where you and one or more of your dependents, or those of your spouse or partner, lived,” explains chartered accountant Kevin Dunn in Peterborough.

In 2011, you may be able to claim a maximum Federal credit of $4,282 for each eligible dependent, who include not just your own children or grandchildren, but many members of extended family, too. There is an equivalent Ontario Caregiver Credit as well.

“To qualify for the amount, each person being cared for must be 18 years of age or older and be dependent on you due to an impairment in physical or mental functions,” Dunn continues. “Or, in the case of a dependent parent or grandparent, they must have been born in 1946 or earlier. And, the person in question must have had a net income of less than $18,906 in 2011.”

It pays to hire apprentices

Are you an employer paying wages to a new apprentice? “Then the Apprenticeship Job Creation Tax Credit and the Ontario Apprenticeship Training Tax Credit could help you,” says chartered accountant Scott Conner, a tax specialist with BDO Canada in Huntsville.

Conner explains that eligible employers will receive a federal nonrefundable tax credit equal to 10 per cent of the salaries and wages paid to qualifying apprentices, to a maximum credit of $2,000 per year, per apprentice.

At the Ontario level, depending on your total payroll and timing of the expense, the credit rate could be as high as 45 per cent, for a total available credit of up to $10,000 per year, per eligible apprentice, to a maximum of $40,000 over the first 48 months of the apprenticeship.

“Qualifying apprentices are those who work for eligible employers in qualifying trades during the first two years of their provincially registered apprenticeship contracts. Qualifying trades are prescribed, and include the Red Seal trades like tool and die makers, welders and plumbers. Regulations prescribing other trades may be forthcoming,” advises Conner. 

Be prepared for a tax audit

You’re being audited...Just knowing that is enough to strike fear in the heart of the average taxpayer.
“There’s no need to panic,” advises chartered accountant Don Knechtel, Partner, Taxation, with Durward Jones Bark-well & Company in Grimsby. “It is important to be prepared, though. After your tax return is assessed, CRA may select it for further scrutiny. If your return is being reviewed – what many call ‘audited’– you’ll want to have your documents ready.
“The tax audit should not normally be a concern, as long as you have maintained proper books and records, not made inappropriate tax filings, and kept all your relevant tax receipts,” Knechtel continues.

“If, for example, you e-filed your personal return, the audit may be as simple as providing backup slips for items including Registered Retirement Savings Plans (RRSP) contributions and donations.

“For business owners though, a field audit may be more detailed and involve a review of bank accounts, sales and purchase invoices, ledgers, journals, expense accounts and corporate minute books,” explains Knechtel.

Medical-dental – what’s deductible?

CRA offers some tax relief for many health-related expenses that OHIP doesn’t cover. There are rules and limitations, but also ways to maximize the benefit.

“You can claim a tax credit for many healthcare expenses, providing the care or product qualifies and is prescribed by a licensed physician, dentist or other recognized medical practitioner,” explains chartered accountant Clyde Catton, Tax Partner with BDO Canada in Oshawa.

“Only those expenses that exceed either three per cent of your net income or $2,052 – whichever is less – are eligible.”

You must have receipts to back up your claims, and while many health practitioners now offer monthly payment plans, Catton recommends you try to pay as much as you can within one year.

“You can claim your own or your spouse’s and dependent family members’ expenses for any 12-month period, providing the end-date falls during the tax year in question,” he says.

“So the more you pay, the greater the amount you’ll have above that three per cent or $2,052 threshold, and the greater your tax credit will be.”

Split pension income to save taxes

Even in a difficult economy, retirees may be able to save on their taxes by splitting eligible pension income with their spouses.

“Income-splitting is a way for families to reduce their total tax liability by shifting income to the lower-income earner from the higher earner,” explains Knechtel. “A pensioner can transfer up to 50 per cent of eligible pension income to his or her resident spouse or common-law partner.”

However, there are some specific eligibility rules.

“Income from a registered pension plan can be split, regardless of the recipient’s age. Income from a Registered Retirement Savings Plan (RRSP) annuity, Registered Retirement Income Fund (RRIF) or deferred profit-sharing plan annuity is also eligible if the recipient is 65 years of age or older.”

The RRIF and RRSP annuity payments are also eligible for splitting before the age of 65 if they are received due to the death of a spouse.

Pension-splitting is an important part of the retirement-planning process. It lowers the taxable income of the spouse with the higher marginal tax rate and raises the taxable income for the lower-income spouse – a transfer that produces a combined tax saving.

“Just be careful in determining the amount of pension to be split. If too much income is transferred to the lower-earning spouse, it could trigger a claw-back of some Old Age Security (OAS) benefits and also affect the couple’s ability to claim certain personal tax credits,” advises Knechtel.

Monthly public transit passes are tax deductible

Riding the rails each day may be a little easier to take knowing that you can deduct the costs. “If either you, your spouse/common-law partner, or your child who was under age 19 on December 31, 2011, commutes on buses, streetcars, subways, commuter trains or ferries, you can claim a nonrefundable federal tax credit for eligible public transit costs,” advises chartered accountant Gary Kopstick, Partner, Taxation Group at Soberman, Toronto.

“This credit applies to monthly passes and weekly passes, as long as four consecutive weekly passes are purchased. Certain electronic payment cards also qualify for the credit. The passes or cards must be purchased for use by you, your spouse/common-law partner or any of your children under the age of 19. If you are entitled to this credit, keep your receipts and passes.”

“Up” your payroll deductions to avoid owing taxes?

Are you savings-challenged? If so, you might think that asking your company’s payroll department to increase your regular income tax deductions is a good strategy to avoid the possibility of extra taxes at year-end.

“Not necessarily,” says James Kraft, a chartered accountant, Certified Financial Planner and Taxation Specialist with PlanningWise Inc. in Toronto. “I first recommend that people seriously assess their own abilities to manage money as well as their goals with respect to savings.”

On the “pro” side, Kraft says that increasing payroll deductions can be a forced savings plan. Some may prefer it, because the money never comes into the house and they can’t get their hands on it.

But there are significant “cons”. “You’re lending the government money, interest-free. And, you sacrifice flexibility, because you can’t get at your ‘savings’ if you need them.

“It’s a matter of will power,” he continues. “Can you set aside funds and save? Can you make a budget and work within it?”

If you can answer yes to either of these questions, even to a very limited extent, then there are other – and often better – alternatives.

“Why not ask your employer to increase contributions to the group pension or the group RRSP?” Kraft suggests. “Other good options would be to set up a monthly savings plan into a Tax Free Savings Account or increase your mortgage payment. Both of these can be done automatically, pulling the money out of your bank account on the day your pay is deposited. You won’t have a chance to spend it.” As time goes by, you – and not the Canada Revenue Agency – will have the benefit of that money and the interest it makes for you…in your home, your children’s education or your own income at retirement time.

Tax benefits for the self-employed

“If you are self-employed, make sure you know about limitations to available tax benefits,” says Kopstick.

“For example, if you operate out of two offices, including one in the home, the costs related to the home office may not be deductible. In addition, generally only 50 per cent of meals and entertainment expenses you incur for the business are deductible (although there are exceptions to allow for a larger deduction in some cases).

“You may also deduct a portion of Canada Pension Plan (CPP) contributions that represent the employer’s share to a maximum of $2,217.60 for 2011.”

How much should you save for taxes?

When you withdraw savings from an RRSP or RRIF account, the amount becomes part of your taxable income that year. So is it wise to put a certain amount aside to pay the taxes?

“Many things can affect the amount of income tax you’ll have to pay when you withdraw RRSPs or RRIFs,” says Gordon Jessup, a chartered accountant and Partner with Fuller Landau in Toronto.

“With RRSPs, there is a withholding tax on withdrawals. But it may not be enough to offset the taxes you’ll have to pay,” he explains. “On a lump sum of $5,000 or less, the withholding tax is only 10 per cent; on withdrawals over $5,000, but not exceeding $15,000, it’s 20 per cent; and on larger withdrawals it’s 30 per cent.”

“Due to the low withholding on these withdrawals you may have to pay quarterly tax installments the following year. Many people are surprised the first time they get an instalment notice from the Canada Revenue Agency. When you add in other sources of income that has little or no tax withheld, such as CPP and Old Age Security, you could have a large balance due at tax time.”

But there can be ways to cut the amount of taxes you owe.

“If you’re retired and taking the minimum amount from an RRIF, there may be little or no withholdings,” Jessup explains. “And, under the right circumstances, as much as half your pension income can be split with your spouse. Depending on how much he or she earned during the year, doing so can significantly reduce the taxes you’d otherwise have to pay. It can also keep you from being subject to the claw-back on your Old Age Security”

– The Institute of Chartered Accountants of Ontario

Posted: Apr 2, 2012

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