Year End Tax Tips for Year Long Savings
By Daniel Varanelli, CFP, CGA
With the end of the year fast approaching, strategies and ideas to reduce the overall amount of income tax we pay become forefront on our mental "to do" list.
When you consider how much we pay in income tax, it really does deserve more than the token amount of time most of us give to it. There is no lack of information today to help us learn and understand our tax system. Information abounds in published books, magazines and newspapers specifically for the average taxpayer. The Internet is naturally a great resource. Links to private or government sites contain a profusion of information.
There are a number of practices that will help everyone whether your tax situation is simple or complex.
Good record keeping - credits and deductions can only be claimed if you have proof. Maintain a file folder or accordion file to store tax slips, charitable receipts, daycare receipts and medical expenses. While the majority of our tax slips arrive during February and March, we often receive slips and receipts throughout the year that we need at tax filing time. Without a system, we are very likely to forget about that summer camp receipt that was issued to us in August or the charitable receipt given to us from a co-worker for sponsoring them in a walk-a-thon.
Equally as important you need to keep records of all income sources. A forgotten and unreported T4, T5 or T3 slip will result in a reassessment of your income tax return resulting in tax balance owing plus an interest charge.
File your Tax Return on Time - Individuals without self employment income must file by midnight April 30th while those with self employment income have until June 15th. If you have a balance owing, interest will accrue from May 1. The penalties for late filing can add up. First, failure to file a return on time results in a penalty of 5 per cent of unpaid taxes plus 1 per cent per month up to maximum of 12 months. Subsequent failure to file on time within a 3 year period results in a penalty of 10 per cent of unpaid taxes plus 2 per cent per month to a maximum of 20 months.
File even if you don't owe or think you have a refund - filing an income tax return satisfies two purposes. First, it reconciles taxes and deductions taken at source with our declared income and deductions, and second, it is the means by which the government determines our eligibility for certain social benefits like GST, child tax benefits or provincial sales and property tax credits. For seniors, it is used to determine eligibility for various pension supplements. File a return even if you have no taxable income in order to qualify for certain credits.
Don't File in Isolation - while we all file individual income tax returns in Canada, there are certain credits that are transferable amongst members of the same family or may have a greater benefit if taken by one spouse. Unused personal credits of one spouse can be transferred to the other spouse. Medical expenses are usually best claimed by the spouse with lower net income while charitable donations and political donations are best claimed by the spouse with the higher income. Unused tuition and education amounts up to $5,000 can be transferred from a spouse or child. While there is less flexibility in the transfer of deductions, where permitted, the spouse with the higher income should use them. A safety deposit box expense is the best example. For couples with limited funds for RRSP investing, the spouse with the highest income should make the contribution.
Recognize Changes To Your Tax Situation - certain life events can result in changes that may give rise to additional deductions or credits. Married or common law couples can claim the other spouse's unused credits. Having a child may result in receiving child tax benefits or claiming child care expenses. When the child is older, post-secondary school tuition may be transferred to a parent. Interest costs incurred on investment loans may be deductible. Supporting a parent or other dependant could qualify for additional credits or becoming disabled or infirm may also have significant tax implications.
Seek Professional Advice - You can't be expert in everything. Seek the advice and guidance of a Certified Financial Planner professional if your situation becomes too much for you to handle.
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