Income Tax Tips for Canadian Taxpayers

The Government of Canada has called it the single most important personal savings vehicle since the introduction of the RRSP. Have you heard about the tax free savings account (TFSA)?

The TFSA became available on January 1, 2009. It allows Canadians aged 18+ to save up to $5,000CDN every year in a TFSA and to withdraw funds and/or investment income - including capital gains - without being taxed. You can also put back the money you've withdrawn without reducing your allowable contributions.

Although there is no tax credit for contributions to a TFSA, Canadians can realize significant savings in using a TFSA to earn interest without paying taxes on that interest.

As of 2007, Canadian pensioners became able to split their pension income - whether from a corporate/other pension plan or certain annuities from an RRIF or RRSP - with their resident spouses or common law partners. If you have eligible pension income, you can use this tax opportunity to split up to one half of your pension with your partner, which may mean significant tax savings for you both.
 

Did you know that capital losses can be carried back 3 years to recover tax paid on capital gains? If you had no capital gains in 2010 but you did have losses, you could use your capital loss to offset a capital gain in any of the 3 previous years (i.e., 2007, 2008 or 2009 taxes).
 

Even if you are certain that you have no balance owing or refund due in a given year, file a tax return for that year. Why? Because filing:

• Reduces the ability of the CRA to subsequently make arbitrary adjustments to your income and taxes owing for that tax year
• Determines your eligibility for government programs, like the Canada Child Tax Benefit (CCTB), GST/HST credit or any new tax rebates that may be announced
• Reports earned income, which increases your future RRSP contribution room - and we all know the value of RRSPs as tax reduction tools

Did you know that the rate at which you're able to claim your charitable donations nearly doubles for amounts over $200? For that reason, you should not claim less than $200 in charitable donations in any year.

Instead, if you want to optimize your tax situation, carry forward charitable donations (for a maximum of 5 years) and claim them all in a year where your income is higher. You can even combine your donations together with your spouse/common-law partner and claim them all on the return of the higher-income spouse, maximizing the credit.

Contributions to a Registered Education Savings Plan (RESP) are not tax deductible. However, any earnings on that investment are sheltered from taxation and not subject to tax until withdrawn when the recipient begins post-secondary education.

Limits for contributing to RESPs:

• There is no annual limit for RESP contributions (prior to 2007, the annual limit was $4000)
• The lifetime RESP contribution limit is $50,000

Most people know they can claim payments to a doctor, dentist, nurse, hospital and prescription medications and medical devices. But did you know you can claim:

• Laser eye surgery
• Batteries for a hearing aid
• Incremental costs of special foods for those with Celiac disease
• Certain amounts for attendant care/care in an establishment for a spouse or dependant
• Certain expenses for modifications to your home to accommodate a person with a disability

Did you know...?

• To claim medical expenses, they must exceed 3% of your net income
• To maximize your family's claim, you should claim all medical expenses for yourself, your spouse or common-law partner and your dependants (under 18) on one tax return
• It's usually better for the spouse with the lower income to claim medical expenses - but, if the lower-income spouse already has enough tax credits/deductions, claim them on the higher-income spouse's return or carry them forward
• If you have to travel more than 40km to get medical treatment not available locally, you can claim your travel costs as medical expenses - and more than 80km of travel lets you claim accommodation costs, too

On your Notice of Assessment, you'll find your maximum contribution limit for your RRSP. To maximize your tax advantages, it's usually best to contribute the full amount (for yourself and/or your spouse/partner). But beware! Contributing over your allowed amount may result in actually owing taxes. If you over-contribute, you'll likely need to complete a T1-OVP to calculate the excess contributions and to determine whether you'll pay a 1% tax on those excess contributions.

Do you know when to carry forward RRSP contributions and when to claim them?
Just because you contribute to an RRSP in 2008 does not mean that you need to deduct those contributions on your 2008 taxes. If your income in a tax year is low, consider carrying forward your contributions to a future year when your income may be higher.

During low-income years, it's a good practice to contribute to your RRSPs - even if you're not going to deduct them - because any investment income you earn is sheltered from taxation.

If a couple has limited financial means, the spouse/partner with the higher income should consider making the RRSP contributions, as he or she will benefit the most from the allowable deduction. This deduction is calculated according to the taxpayer's tax rate: the higher the tax rate, the more beneficial the deduction.

Thinking of Contributing to Your Spouse's RRSP?
Contributing to your spouse or common-law partner's RRSP can be a smart tax decision at any age - but it's particularly beneficial after one spouse reaches/exceeds the age of 69. If you are over 69 and have RRSP contribution room, and if your spouse is under 69, you may use your RRSP contribution room by contributing to your spouse's RRSP. The result? You reduce your current income and increase your spouse's income on retirement.

If you contribute to your spouse or common-law partner's RRSP, consider who will report income on withdrawal:

• If your spouse withdraws funds within 3 years, you (not your spouse) will report the income
• If your spouse withdraws funds after 3 years and/or at retirement, your spouse will report the income, likely at a lower tax rate

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As soon as you rent out part of your home, you've changed the use of that part from your primary residence to a rental property. Accordingly, during the time that you own and rent out space in your home, you will need to claim rental property income on your tax return.

When you sell your home or stop renting a portion of it, you may be required to report a corresponding capital gain. To avoid paying for capital gains:

• Ensure that the rented area of your home is small, relative to the rest of your home
• Don't make structural changes to your home to create rental space (e.g., no second-storey additions)
• Don't claim capital cost allowances on the rented area

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If you are supporting one or more individuals, you may be eligible to claim tax credits for them. You can often claim credits for your spouse/partner, children, infirm adults (if you are the caregiver) or certain other relatives living with you. Plus, you may also be eligible to receive a transfer of any unused credits they have on their personal income tax returns.

Additional family tax tips include:

• Donations & medical expenses: These can be claimed on a family basis, so you can receive maximum tax advantages if you file your family's tax returns at the same time
• Tuition & education amount transfers: Students often don't need to claim all of their tuition fees in order to reduce their taxes to zero - so consider transferring an unused portion of these amounts to a parent (the student does not have to live with the parent in order to do this)
• Camps/Boarding schools: You can often claim up to $175/week for a child under 6 years of age, $250/week for a child with a disability and $100 for any other eligible child
• Caregiver amount: You may be able to claim all or part of the Caregiver amount if you had a grandparent or a mentally/physically infirm dependant who is over 18, lives with you and had a net income of less than $18,081

List All Your Children
You can claim a maximum of $7,000 in child care expenses for each child younger than seven and $4,000 for each child older than seven but not yet seventeen on December 31 of the tax year. To receive the maximum claim for child care expenses paid, list all children in chronological order. No child care expenses this year? Still list all your children - you may be eligible for government assistance programs like the Canada Child Tax Benefit (CCTB) and the GST/HST credit.

Have You Registered for the Canada Child Tax Benefit?
In order to qualify for the Canada Child Tax Benefit (CCTB), you need to register any children you have and make sure that both you and your spouse/common-law partner file income tax returns every year. CCTB payments are tax-free.

If you paid tuition to a specified educational or training institution during the tax year, you are eligible to claim a credit for your tuition fees paid. This not only applies to post-secondary education taken towards earning a degree but also to employment training courses not provided by your employer. Taxpayers are also eligible to claim an education credit for each month spent as a full-or part-time student.

You can claim:

• Tuition fees for post-secondary education
• Lab expenses
• Library fees
• Examination fees
• Mandatory computer service fees
• Transit passes
• Some textbooks & books included in fees for correspondence courses
• Any GST, HST or PST included with the above

You cannot claim:

• Private tutoring
• Summer school programs
• Supply & equipment costs
• Student association fees
• Social or athletic fees
• Parking fees
• Board & lodging expenses
• Driver's education
• Music, art, drama or dance lessons not associated with a post-secondary educational program
• Camp fees
• Pre-school or play school fees

Carry Forward or Transfer Tuition & Education Credits
If you're a student, you may carry forward unused tuition & education credits to a year when your income may be higher - or you can transfer them to a supporting person (e.g., spouse, common-law partner, parent, grandparent). NOTE: You can only transfer current-year education & tuition amounts, not balances that you carried forward from a previous year.

If you are repaying your student loans, you are likely paying interest. But there's good news: You can claim your interest paid on those loans. (Wouldn't getting a bigger refund be a great way to pay down your loans?)

Also, you can carry forward student loan interest for up to 5 years. So, if you paid student loan interest in 2004 or in subsequent years and did not claim it on a previous tax return, you can claim it on your 2010 taxes.

The provincial tax rates you are subject to are based on those of the province where you live as of December 31 of that calendar year. If you are moving to a lower provincial tax rate province, move before the calendar year is up in order to be eligible for the lower rates in the year of filing. Likewise, if you are moving to a province with higher tax rates, wait - if you can - until after December 31 to qualify for one more year of lower tax rates.

Remember that it is the province in which you reside on December 31, not necessarily the province where you are employed, that determines your provincial tax rates.

Because interest paid on a business or investment asset loan is tax deductible, use borrowed money to purchase business & investment assets, and use your personal cash to purchase personal use assets, such as a house or vehicle.

In order to deduct the interest cost, the direct use of the borrowed funds must be to purchase business or investment assets. If you are self-employed, borrow to invest in your business, not to purchase investment assets such as stocks or bonds.

Still Looking for Answers to Your Tax Questions?
Because there are literally 100s of deductions available to Canadians, it's hard to answer all your questions here. But why go looking for answers when you can use all the tools in TurboTax right now?

Choose your TurboTax for the 2010 tax year