You can feel the vibrations coming closer and closer, rattling the walls, causing your artwork to shake. No, it’s not an earthquake or the reincarnation of Godzilla stalking you — it’s the Canada Revenue Agency’s April 30 income tax deadline approaching.
Each year, you brace yourself for the bite it’s going to take out of your bank account, getting more and more anxious as filing day draws near. Fear not, the Star has your back. We talked with some financial experts for advice on how to pay less tax. Here are their top 10 tips for keeping more of that hard-earned money in your pocket:
1. Check your email for receipts. Don’t miss out on credit for charitable deductions because you haven’t bothered to collect your donation receipts, says Tracey Bissett, president of Bissett Financial Fitness Inc. in Toronto. Many organizations today send tax receipts by email, rather than via Canada Post. However, the tendency is to ignore them when they come in, so search your email, using keywords such as “tax receipt” or “donation.” The individual amounts per donation may be small, but they can add up to a smaller tax bill.
2. Donate deliberately. If you are planning to make charitable donations, consider donating stock with accrued capital gains rather than cash, says tax accountant David Reine, a partner at SBLR LLP Toronto. You will avoid tax on any accrued capital gain and will still receive a donation credit for the fair market value of the donated stock. Though it’s too late for your 2019 tax return, consider it for 2020’s taxes.
3. Maximize your RRSP contribution. Lower your taxable income and taxes payable while simultaneously saving for retirement by contributing to an RRSP (Registered Retirement Savings Plan). Your CRA Notice of Assessment from the prior year will inform you of the amount that you are eligible to contribute this year, so don’t hesitate to save. The deadline for contributions this year is March 2.
4. Contribute to a spousal RRSP. If you’re married, you can create an RRSP in your spouse’s name and make contributions to it regularly. At retirement, this allows you to split income with a lower income spouse and pay lower taxes as a result.
5. Track your medical expenses. Even if you have a health benefits plan, not every cost may be fully covered or reimbursed. Depending on how much you spend out of pocket, you may be able to claim tax credits for some of these expenses. Keep your receipts so you have proof.
6. Include a home office. If you run a home-based business, you can deduct a percentage of your mortgage interest or rent, plus utilities, from your taxes. Of course, the space you claim must be primarily dedicated to your business. Calculate the percentage of your home that is used as an office and apply that to the aforementioned costs to determine how much you can write off annually.
7. Don’t deny disability. As the population ages, disability is more and more common, says Reine. If you have certain health issues, you can apply for a disability certificate from the CRA to allow for additional tax credits and the ability to claim the costs of a retirement residence. You’ll need your family physician to complete the disability tax certificate form before submitting it to the CRA. Many people don’t realize that hearing, vision and mobility issues could be disabilities that qualify.
8. Make your move count. If you relocated more than 40 kilometres from your previous workplace last year, you can deduct your travel and moving expenses on your personal tax return, as well as the trips you took to look at properties in the new location. Be sure to keep your records and receipts from any of these trips and moving expenses.
9. Withdraw assets wisely. For retirees, it’s important to determine which assets to withdraw first in order to cover any income shortfalls after you receive your government and employer pensions, says Wendy Chung, an investment adviser with RBC Dominion Securities in Toronto. The order depends on the types of assets you hold and your asset allocation, as well as your marginal tax rate. Generally, if you’re in a high tax bracket, it makes sense to withdraw assets that attract the least amount of tax first. If your spouse is in a significantly lower tax bracket, consider withdrawing their assets before yours — and your non-taxable assets before your spouse’s. While personal circumstances vary, generally, it’s best to use your least-flexible sources of income first. After that, it’s generally best to draw down assets that trigger the least amount of taxation.
10. Give me shelter — maybe. Different types of investment income — interest income, Canadian dividend income, capital gains or foreign income — are taxed differently, says Chung. Interest income and foreign income are generally taxed in the same manner as employment income, which isn’t as favourable as the way Canadian dividends and capital gains are taxed.
It’s important to determine both the types of investments that meet your goals and needs, as well as the type of account that makes more sense to house these investments.
For example, tax-sheltered vehicles such as TFSAs or RRSPs may be suitable places to house investments that are subject to the highest level of taxation — Canadian and U.S. interest-bearing investments, Canadian dividends and investments yielding capital gains.
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But to get the benefit of the preferred tax treatment of capital gains and dividends, it may be better to hold equity investments such as stocks that pay Canadian dividends in a nonregistered account. Similarly, you can only claim capital loss on an investment held outside of a tax-sheltered account.
You can also consider holding fully taxed interest investments, such as interest, inside registered accounts to defer or eliminate the tax on any income that is fully taxable.