Do you wonder if your are paying too much tax? If you grossed about $50,000.00 last year, the average Canadian paid almost 46% to the respective governments. Is there more you can do? We may just have the answer for you. This short list is based on our years of helping our clients legally and ethically reduce their tax liability.
Use Your RRSP Deduction –RRSP’s are still a good tax deduction. Even if you do as little as $20.00 per week, you can still get as much as a $400.00 tax break at the end of the year while your money compounds “tax free”. You may be eligible to participate in spousal contributions depending on your marital status. It is simple to start a plan, many Financial Institutions offer fully on-line services to start an RRSP. If you have not used up your available RRSP room previously, did you know you can borrow to contribute the maximum and potentially reduce all of your taxable income? Use that refund then to repay the RRSP loan and you are way ahead of the game. You can find out your RRSP limit by calling CRA at 1-800-959-8281.
Donations -In Canada, there are a wide variety of charities you can give to. This includes outreaches, churches and other worthy causes. As long as they have a Charity Number assigned by Revenue Canada, you qualify for a tax credit of up to 29% for all cash and goods donations which have receipts issued. This can be a good opportunity to clean the house of things you don’t want, but others could use. Depending on what you give away, you should get a receipt for the fair market value of the item. For example, your donation of $1,000 worth of old furniture to your church can give you a $290.00 tax break. As a bonus, you can save your receipts for up to 5 years. Suppose you donated $1,000 of furniture each year for 5 years, you can get a $1,450.00 tax break for cleaning your house and help someone out! As far as foreign donations go (including US), you should contact the tax office to make sure the organizations qualify.
Education -Have you thought of upgrading your skills or taking a course? Most educational institutes qualify for the tuition credit provided it is post-secondary, vocational or job-related. As a bonus, most also get the time credit, that is $200/$400 (current rates for the year 2002) for each part/full time month they attended. Suppose you took a $500.00 part time evening course for 3 months, your tax break would be as much $286.00, or a 26% tax credit. Now suppose you went full time for that same semester and your tuition was $2,000.00. Your break is now $832.00. Tuition can also be carried forward to future tax years which are most beneficial. As a bonus, they can be transferred between spouses and dependants.
Private Health Care Plans -Do you have a lot of medical expenses, dental work or prescription drugs? While many of these are tax deductible, it may still be cheaper to buy a health care plan rather than paying for these and deducting it. Supposing your medical expense is $2,000.00 for the year. Your tax break would be 26% $520.00, so your still out of pocket $1,480.00. Now suppose you buy a plan for $500 per year with a 20% deductible (these of course vary). Therefore you would pay for the premium of $500.00 plus $400.00 for the medical expenses for a total of $900.00. Not bad so far, as you are ahead $580.00. Now for the bonus; both the premium and deductible are tax credits of 26%, so you get a break of $234.00 for a net out of pocket of $666.00 or a saving of $814.00. As an extra bonus, most plans reimburse (unless you are on a direct payment upon purchase) you within a short time and you don’t have to wait to file your income tax before you see the cash in your pocket.
Start an Investment Portfolio -Outside your RRSP, put your invested money into tax friendly vehicle. Specifically, dividend and capital gains oriented investments. CRA taxes these at a lower rates than ordinary investment income earned in your bank account, T-Bills, Bonds, GIC’s etc. As an investor, you are entitled to additional deductions such as interest on money borrowed to fund your investments, professional consultation/accounting fees, disposition costs and more over and above your personal deductions.
Start a Business -This is considered one of the most lucrative tax opportunities around. Not only is it tax smart to do this, but today it is the “In Thing” to be running your own operation. In Canada, almost a million businesses get started each year and if you haven’t done so already, you’re missing the boat. People want the freedom to market their own talents and find it difficult to do on the job working for somebody else. If you’ve got something to offer in which someone will pay you cash for, why not get started? If you’re not sure what you want to do, there are many discovery courses and books out there which will help you expand your creativity. If this doesn’t work for you, consider a proven franchise or direct marketing program. Have an objective business consultant look at the system before investing..If the business seems profitable and viable to you, you’re likely on to something. If it’s been running negative cash flow and doesn’t make sense, move on.
Consider Rental Income -More and more Canadians are adopting rental income as a side revenue opportunity. Why? Generally it’s fairly easy for almost to get into, there are tax advantages and several ways of doing it. Also if done right, within a few years it could become your main source of passive income. Generally speaking all expenses incurred to earn taxable rental income are deductible and any net losses can be used to offset your other income from jobs, etc. There are three main ways I recommend getting started. First, you can rent out a portion of your home as a border or section of the house depending on the local zoning laws. Even if you rent and don’t own your home, you can still do this and qualify for the rental statement. Second, you can buy a property and do everything yourself. This can be a stretch for many people, especially when it comes to the managing of; however once you’re through the learning curve it can be lucrative. Last is to buy a managed rental property. This is more attractive than the second suggestion simply because you have professionals doing all the leg work for you. You have to make sure the company you are dealing with is reputable and works for your business.
See if Expenses on Your Job are Deductible -Do you earn commissions as part of your wages? Do you have expenses on the job which are not reimbursed and considered above normal? For instance, if you drive to and from your place of work, that’s considered a normal, personal expense which is not deductible. However if you use your vehicle on the job to travel between calls, meet clients, etc. this is considered deductible. Same is if you use part of your home, a cell phone, internet, office expenses, supplies, travel, meals and more.
Do you or your Family member qualify for the Disability Tax Credit? – this underutilized credit is available to individuals who have a prolonged impairment that has lasted or is expected to last for a minimum of 12 months. The personal deduction allows you to claim a personal credit of 6890.00 (that is a potential tax savings of 1800.00) and for dependant children the total is 10909.00 (potentially 3000.00 tax savings). If you have a family member who has a disability and you maintain a dwelling for them to live in or provide support, you may be eligible for a caregiver deduction on your income taxes. Recent court cases have expanded the disabilities or impairments that Canada Revenue Agency will allow. If you think this may apply to you, then call us to discuss the details and we can advise you if this deduction may apply to you.
Consider New Income Splitting for Pensioners - The spousal RRSP is still an excellent means for couples to split income and save on income tax despite the federal government's new rules allowing pension splitting. Under the new rules, a pensioner can allocate up to 50 per cent of annual pension income to a spouse (or common-law partner) and have that taxed at presumably a lower marginal tax rate in the hands of the spouse. This would produce tax savings. This splitting rule applies to employer-sponsored pension income, either from a defined-benefit or a defined-contribution plan. It also applies to income from an RRSP annuity, a RRIF, a LIF (locked-in RRIF), or a deferred profit sharing plan annuity, but only if the transferring spouse is 65 years of age or older. (There is no age restriction for the spouse who receives the income allocation.)
Pension-related income that is ineligible includes:
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