Financially Speaking

Tax return tips that can really add up

There’s not much that Canadians enjoy more than reducing the amount of tax we pay. Fortunately, there are a number of tax-saving opportunities to help along the way. The first step in reducing your taxes is to take advantage of all the tax credits and income deductions available to you.

Credit versus deduction

Tax deductions help reduce the total amount of your income that is subject to tax, which could also reduce your marginal tax rate by moving you into a lower tax bracket. Tax credits, on the on the hand, directly reduce the actual amount of your tax bill.

Tax deductions, such as RRSP contributions, are of greater benefit to higher-income earners. They reduce taxable income that would be taxed at your marginal tax rate. Non-refundable tax credits reduce the amount of tax payable by the same amount for everyone, regardless of their marginal tax rate.

Using the deductions and credits to which you’re entitled is only half the battle. The other half is using them smarter.

Year-end tax tips

The following is a checklist of tax strategies to consider before the end of the year. These strategies can reduce current and future income taxes:

• Contribute to an RRSP. Make your Registered Savings Plan (RRSP) contribution as soon as you can. Not only will you save taxes on your current year’s tax return, you’ll be able to take advantage in the futures from tax-deferred growth. If your spouse earns less than you do or is anticipated to have less retirement income than you in the future, consider making your contribution to a spousal RRSP – this can allow you and your spouse together to possibly save more taxes on a combined basis during retirement.

• Make installment payments on time. If you are required to pay quarterly tax installments, the last one for the year is due December 15th. Missed payments can result in non-deductible interest and possible penalties.

• Contribute to an RESP. The deadline to make an RESP contribution to obtain a Canada Education Savings Grant* for the current year is December 31st. While there is a limited ability to ‘catch up’ on missed grant money, the annual RESP contribution limits do not accumulate. You are entitled to contribute up to a lifetime maximum of $50,000 per beneficiary to an RESP. If the beneficiary meets the age requirements, then the first $2,500 of contributions will generate a minimum of $500 grant.

*Canada Education Savings Grant is administered by Human Resources & Social Development Canada. Other grants may apply in some circumstances, including the additional Canada Education Savings Grant, the Canada Learning Bond and the Alberta Centennial Education Savings Grant (which is sponsored by the Government of Alberta.).

• Realize capital losses. If you are planning on selling a money-losing investment to offset any realized capital gains, do it in time to ensure that the settlement date is on or before December 31st. Also, consider whether it makes tax and financial sense to delay a sale in order to report realized capital gains on next year’s income tax. Keep in mind that the ‘superficial loss’ rules may restrict your ability to claim capital losses if you purchase the same investment within 30 days before, or after, you sell it.

• Wind up RRSPs if age 71. Those who turn age 71 this year are required to wind up their Registered Retirement Savings Plans (RRSPs) before December 31st. Arrange to transfer funds to a Registered Retirement income Fund (RRIF) or annuity. You have one last chance to make an RRSP contribution to your plan, but it must be done before it is wound up at the end of the year. If you’re turning age 71 this year, you may wish to make an RRSP contribution in December based on an estimate of your earned income for this year. If you have no contribution room available this year, the contribution will be an ‘over-contribution’ into your plan, but the resulting penalty tax will apply only for the month of December and could be small relative to the benefits of the long-term tax-deferred compound growth on your contribution (and the deduction you’ll be able to claim against next year’s income). Also, if you have earned income, you can continue to make contributions to a spousal plan until the end of the year your spouse turns age 71.

• Make charitable donations. Make your charitable donations by December 31st if you want those donations to be eligible for a tax credit for the current year. Total donations for the year in excess on $200 will save you tax at approximately your top marginal rate. Donations of both spouses should be combined to maximize the credit.

• Pay the ‘tax-break’ items. Payments that qualify for tax credits and deduction should be made by December 31st. These include expenses such as certain moving expenses, child care payments, spousal support, tuition fees, union or professional dues, interest on student loans, medical expenses, investment counsel fees, safety deposit fees and political contributions.

These are but a few of the opportunities for year-end tax savings – it pays to sit down with your advisor before year-end to ensure you are not missing out on other tax-reduction strategies.