It’s that time of year again – tax time! Throughout the first couple of months of the New Year, T-slips and other tax documents start arriving in the mail. You should keep orderly records throughout the year, but if you haven’t, now is the time to get a file folder, shoebox or other suitable container and gather up all your receipts and supporting documents to get everything in order.
Related: Smart Tax Planning Strategies
One of the most common questions we get asked is, when will I get my refund? Many of us use tax preparation software such as TurboTax (formerly Quick Tax) that are interactive and easy to follow and use. They carry forward information nicely from prior year tax returns (assuming you use the same one each year), allow you to calculate “what if” scenarios, and simplify filing on-line with NETFILE, which enables you to get your refund much quicker.
If doing a tax return yourself intimidates you, you can take your documentation to a reliable tax practitioner. Either way, double check to make sure all your information is entered correctly.
Tax Deductions
We have a progressive tax system, which means that those who have a higher taxable income during the year will generally pay higher taxes. So it’s important to make sure you take all the allowable deductions available to you to reduce your net income.
The largest deduction for most people will be their RRSP contribution. You can contribute 18% of your 2012 earned income to a maximum of $22,970 (income of $122,222). Ideally, you should be making regular contributions throughout the year but if you need to make (or top up) your contribution, don’t procrastinate and wait until the last minute.
Related: 5 Common RRSP Myths
The deadline for contributions for the 2012 tax year is March 1st. Financial institutions are at their busiest this time of year and you don’t want to be rushed, especially if you want to take out a loan to fund the contribution.
Some other worthwhile deductions that are often overlooked are:
- Union or professional dues -look in box 44 of your T4 slip. Fees may also qualify for a GST/HST rebate.
- Childcare expenses – paid to sitters to enable the parent to be employed or to attend school.
- Moving expenses – you must have moved at least 40 km to your new work location and not have been reimbursed by your employer. Also applies to students who move to attend post-secondary school.
- Carrying charges and interest expenses paid in order to earn income from your investments – Safety Deposit Box charges, accounting and counseling fees specific the buying or management of an investment, interest paid on loans to purchase Canada Savings Bonds or other investment loans. Does not include brokerage fees, penalties for early redemptions, or fees or loan interest for purchasing investments in an RRSP or TFSA.
- Pension income splitting – pensioners can split up to 50% of eligible pension income at any age but must be 65+ to split income from an RRSP annuity or RRIF withdrawal.
Make sure you keep copies of all supporting documentation in case of audit.
It should also be noted that if you served in either the Canadian or American militaries there are many tax deductions you may be eligible for that do not apply to civilians. Military tax preparation software is available to use for free so that military personel are less likely to miss any tax deductions they are able to claim.
Tax Credits
Your resulting Net Income determines the level of social benefits paid under various programs including OAS and refundable credits such as Child Tax Benefit and GST Credit.
Non-refundable tax credits are only used to reduce federal taxes payable, so if you have no income the credits are not payable to you. Everyone gets the Basic Personal Amount, which is indexed to inflation ($10,382 for current tax year).
Some tax credits are transferable to other family members: Age credit, Tuition and Education Credits, Pension Income amount ($1000) and Disability Amount. Other credits, such as Medical Expenses and Charitable donations can be grouped and claimed by one spouse to maximize claims (save all family medical receipts including travel for medical reasons, a claim that is often missed).
Fairly new credits are Children’s Fitness (up to $75 for each child under 16), Public Transit and a portion of the cost of tools used for employment by tradespeople.
Tax preparation software will prompt you to determine which credits are applicable to you and will often distribute the tax credits to your benefit when you prepare a joint return. Make sure you check what it’s doing automatically though.
Tax Time: Filing Your Taxes
Who should file a tax return? The answer is just about everyone over the age of 17. Even those with little or no taxable income should file a return each year to receive lucrative refundable tax credits such as Child Tax Benefit and GST Credit as well as accumulating TFSA contribution room.
Finally, make sure you file on time. Most people dread the annual tax filing routine especially if they have to write a cheque to CRA. For most individuals the tax-filing deadline is midnight April 30.
As well as accruing hefty late filing penalties and high monthly interest charges on what you owe, you also miss out on creating RRSP or TSFA contribution room. That will cut out two important tax savings vehicles available to you.
Related: RRSP Over Contribution Limit And Carry Forward Rules
So, pick a day or two to arrange your family’s documentation and get to work. Take advantage of all tax preferences you are entitled to and then start planning for the next tax year.
(Note: Evelyn Jacks has written numerous books on how to complete your tax return – updated annually – as well as tax facts and tips. Worthwhile reading.)
