A Bigger Tax Refund is Yours for the AskingNo 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.
Under 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 25% and you contributed $1,000 to your RRSP, you would save $250 in taxes.
Ready 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 strategies.
Reduce Your Taxes Now: Maximize Your Credits and Deductions
Here are some tips to help you take advantage of available tax credits and deductions when filing your next tax return. For a more comprehensive list of credits and deductions, or specific strategies related to your situation, consult a financial or tax advisor. Not that details on credits and deductions may change from year to year. Visit the Canada Revenue Agency (CRA) website for specific amounts.
Claim 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.
Medical 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, whichever is less. Provincial tax credits also apply, but will vary according to the province of residence.
Did 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. |
Education 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.
Did you know...
Education and tuition credits are transferable — up to a certain maximum. In other words, if your child attends college or university and earns less during 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. The unused tax credit can be carried forward to future years and only the student can claim this. |
Charitable 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.
Did 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. In addition, if you make an in kind donation of publicly traded securities to a public charity you eliminate the capital gains on that deemed disposition. |
Age 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 $2,000 of qualified pension income, which includes payments from registered or pension plans but does not include CPP or QPP benefits.
Take your deductions
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 (RRSP) contribution, but there are many others you can use to reduce your taxable income.
Moving 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.
Childcare 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.
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.
Act Now to Save on Next Year's Taxes: Use Your Refund Wisely
You've 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 consider:
Maximize RRSP contributions
Your RRSP 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 RRSP will allow you to capitalize on up to a year's worth of investment growth. To get the most out of your RRSP 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.
Set 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.
Pay down debt
If you took out an RRSP catch-up loan, consider using your tax refund to pay back the loan. This will reduce your interest costs and free up cash.
Make Tax Savings a Year-round Priority
Once 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 planning strategies to consider. You financial advisor can help you get the most out of these strategies.
Income-splitting opportunities
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.
Saving 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 strategy.
Sharing 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.
Tax-smart 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.
Don't forget...
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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