Originally published in Bankrate.ca
Title: Seven things to think about for tax season
With the April 1rst tax filing and February 28th RRSP contribution deadlines coming fast, Canadians are slowly turning their attention to fiscal matters. Yet while many regard tax season as a chore, there are big dollars involved. The income, sales and corporate taxes that the federal, provincial and municipal governments levy, grab up close to half of the wealth produced in the country each year.
In short, it pays to stay alert attention when shovelling big chunks of your hard earned pay-checks into the beast’s mouth. To help, we have compiled a completely arbitrary list of things that you ought to think about to make the coming and future tax seasons as painless as possible.
Registered Retirement Savings Plans
One of the biggest tax deferral opportunities says Evelyn Jacks, president of the Knowledge Bureau and author of Essential Tax Facts is Registered Retirement Savings Plans. “I am a big fan,” says Jacks. “RRSPs provide numerous benefits beyond their primary function as a retirement savings vehicle. But you have to start planning early to maximise your opportunities.”
Canadians are eligible to contribute 18 percent of their earned income to a maximum of $22,000 to RRSPs each year. In exchange they get a tax deduction in the amount of the contribution. RRSP investments earnings accumulate tax free, until they are withdrawn.
Tax Free Savings Accounts
Tax Free Savings Accounts provide investors with an opportunity to build up substantial wealth. Canadians are eligible to invest up to $5,000 each year in TFSAs. While the government does not give a tax deduction, you don’t pay any tax on interest and dividends that accumulate in your account. In addition, you can also contribute to your kids TFSAs and the earnings they make are not subject to income attribution rules.
Deduct the proper expenses
Although most tax preparation software packages will automatically deduct expenses such as the $1,051 non refundable employment tax credit, taxpayers need to keep their eyes open to claim others. These include child care and moving expenses, the public transit tax credit and the physical fitness credit. A full list of tax deductions is available on the Canada Revenue Agency’s Web-Site at:
Seniors: split that income
According to Jacks, many seniors are not optimizing pension income splitting opportunities. “Up to 50 percent of the employer sponsored pension plan payments can be split between spouses, which means that a significant portion of the income can be taxed at lower rates,” says Jacks. However she cautions that Canadians who want to split RSP or RIF annuity income need to wait until they are 65 years old to do so.
Student tuition and education expenses
The most obvious costs that students incur that are unique to their situation is the amounts they pay for tuition, education expenses and textbooks. The good news is that there are deductions available in each of those categories. Better still, if students don’t need those deductions themselves, they can transfer up to $5,000 worth of them to parents each year, who are likely in higher tax brackets.
Small business owners
According to Jacks, small business owners, particularly self-employed individuals who don’t benefit from professional tax advice often miss a slew of potential deductions. For example many SME owners don’t realize that they can write off the cost of salaries that they pay to family members, provided the amounts are reasonable and actual work is performed.
Registered Educations Savings Plans
Ageing populations have left western countries struggling to pay the pensions of baby-boomers who are herding en masse into retirement. During the next ten years that problem will explode, and governments will be forced to make drastic cuts.
The fact that older folk tend to vote far more than youngsters, and that kids under the age of 18 are not allowed a voice, indicate that those cuts will disproportionately target youth. Already late last year, the UK announced plans that would triple overnight the annual tuition rates that universities can charge students to CDN $14,400. Similar pressures will almost certainly be felt here.
In short, if you have kids, saving to help fund the massive coming increases in education costs could be one of the best investments you’ll ever make. One way to do that is by investing in a Registered Education Savings Plan. (http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html. You can contribute up to $50,000 over your lifetime to your child’s RESP, and earnings accumulate tax-free.
For more information on these and other tax related subjects, you can consult the Canada Revenue Agency’s Web-Site at:
© 2011, 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998
Peter Diekmeyer Communications Inc.