Bigger Tax Refund is Yours for the Asking
matter your age or income level, there are steps you can take to reduce
the taxes you pay. It may be a matter of claiming all of the credits and
deductions you are entitled to. Or it may involve splitting income with
your spouse to reduce your family's total tax burden.
Canada's graduated tax system, the more you earn, the higher your tax
rate. The rate of tax you pay on the last dollar you earn is known as your
marginal tax rate (your tax bracket). It's an important concept because it
tells you how much you would save by reducing your taxable income. For
instance, if your marginal tax rate is 35% and you contributed $1,000 to
your RSP, you would save $350 in taxes.
to get started? Explore the links below for some timely reminders to help
you generate tax savings this year, as well as information on longer-term
your taxes now
are some tips to help you take advantage of available tax credits and
deductions when filing your tax return. For a more comprehensive list of
credits and deductions, or specific strategies related to your situation,
consult a financial or tax advisor. Note that details on credits and
deductions may change from year to year. Visit the Canada
Revenue Agency (CRA) Website for specific amounts.
all your credits
Tax credits reduce your taxes directly — a $100 credit reduces your
taxes payable by $100. Deductions, on the other hand, reduce your taxable
income — the higher your marginal tax rate, the more a deduction is
worth to you.
expenses. The medical expense tax credit is one of the most
under-used tax breaks. It's available on medical expenses that exceed a
prescribed amount or a certain percentage of income. Provincial tax
credits also apply, but will vary according to the province of residence.
you know... Either spouse can claim the whole
family's medical expenses. Generally, it's advantageous for the
lower-income spouse to claim the credit. Pooling expenses is a great way
to maximize the amount that exceeds the threshold.
expenses. Post-secondary students are eligible for education
and tuition tax credits. Visit the CRA
Website for details. Provincial tax credits also apply, but will vary
according to province of residence.
you know... Education and tuition credits are
transferable — up to a certain maximum. In other words, if your child
attends college or university and owes less tax for the year than the
value of the credits, you can claim the balance. If your child did not
work during the year, you can claim the full value of the tax credits.
Unused credits can be carried forward to future years and only the student
can claim them.
donations. Charitable giving is a great way to support the
causes you care about and help your community. Your donations are eligible
for a federal tax credit that increases once donations exceed $200 for the
year. As with medical expenses, married or common-law couples can pool
their donations to generate even greater savings.
you know... Charitable donations don't have to be
claimed in the year they are made — they can be carried forward for up
to five years. If you (or your family) donate in smaller amounts, consider
grouping together donations to take advantage of the higher credit
available on amounts above $200.
and pension credits. All taxpayers over age 65 can claim the
age credit but the credit available will depend on your income. You are
also entitled to claim a non-refundable tax credit on up to $1,000 of
qualified pension income, which includes payments from registered or
pension plans but does not include CPP or QPP benefits.
Think back over the past year. Are there new or one-time expenses you can
deduct? You're probably most familiar with the tax deduction for your
registered Retirement Savings Plan (RSP) contribution, but there are many
others you can use to reduce your taxable income.
expenses. If you moved at least 40 km to take a new job or
to attend a post-secondary institution full time, you are allowed to
deduct certain moving expenses. These include van rentals, the costs of
hiring movers, furniture storage, and legal fees and real estate
commissions involved in selling your home, among others. The amount is
deductible only from income earned at the new job location or from a
scholarship or research grant income.
expenses. The costs of raising a child — including
daycare expenses and boarding school fees — can be deducted when both
spouses are working or going to school full time. Generally, the
lower-income spouse must use the deductions.
for the self-employed. If you run a home-based business,
there are numerous deductions available to you. Let's say your home office
takes up 25% of your total floor space. You can deduct 25% of your
utilities, home insurance, mortgage interest, and maintenance costs, for
example. Expenses directly related to the business, such as supplies and
your business phone line, are also deductible. It's a good idea to speak
to your accountant or tax advisor, and to keep accurate records.
now to save on next year's taxes
taken advantage of available tax credits and deductions and are expecting
a refund. Although it may be tempting to spend your tax refund right away,
carefully reinvesting that money can generate even greater tax savings —
and investment growth — for you and your family. Here are some ideas to
Your RSP remains one of your most powerful tax breaks. Not only do you
receive a deduction for the contribution you make, the earnings in your
plan compound tax-free. Contributing your refund to your RSP will allow
you to capitalize on up to a year's worth of investment growth.
get the most out of your RSP on an ongoing basis, consider "paying
yourself first" by setting up a regular investment plan. This will
help you maximize your refund for next year.
up and contribute to an RESP
Saving for a child's education? If so, consider using your tax refund to
set up a Registered Education Savings Plan (RESP). Although there's no
immediate tax deduction, the money in the plan compounds tax-free. When
the funds are withdrawn to cover education costs, they're taxable in your
child's hands, not yours.
you know... A federal grant program will match 20% of your
RESP contribution, to a maximum of $400 per year. Click
here for more information on the Canada Education Savings Grant.
If you took out an RSP catch-up loan, consider using your tax refund to
pay back the loan. This will reduce your interest costs and free up cash.
tax savings a year-round priority
you've wrapped up this year's taxes and put your refund to good use, you
can start planning to reduce your taxes for next year and beyond. Here are
some strategies to consider.
Because of Canada's graduated tax system, the more you earn, the higher
your tax rate. If you are married or living common-law and one spouse
earns more than the other, splitting income can reduce your family's
overall tax bill.
and investing. When both spouses are working, the
higher-income earner should pay the bills and household expenses and the
lower-income spouse should save and invest. Income earned on these
non-registered investments may be subject to tax at a lesser rate. Be sure
to keep good records and separate bank accounts if you employ this
government pension benefits. If you will soon be applying
for Canada/Quebec Pension plan benefits, there is an opportunity to split
income in retirement. If only one of you is entitled to benefits, or if
one spouse's benefits will be significantly larger than the other's, apply
to pool the benefits and have 50% paid to each of you. This can help put
more money into the hands of the lower-income spouse.
investing outside of your RSP
Inside your RSP, all investment income accumulates tax-free. Outside your
plan, the different types of investment income — interest, dividends,
and capital gains — are taxed differently. Interest income, from your
savings account for example, is taxed at your marginal rate, while
dividends and capital gains receive preferential tax treatment. If you
plan to build a non-registered portfolio, equity mutual funds are a
tax-smart way to begin.
Always check with your accountant or other tax professional to ensure that
you are filing correctly. Any advice or suggestions regarding deductions
or credits must be investigated thoroughly to ensure you are eligible and
have made the proper calculations.
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