According to Canadian tax expert Evelyn Jacks, the vast majority of Canadians prepay and overpay their taxes all year long by over $100 a month. Why are hardworking people so willing to give the government an interest-free loan just to get a refund at tax filing time?
Be tax wise and look to your payroll department to help you manage your cash flow by taking control of your gross earnings and paying only the correct amount of tax with every paycheque.
Why A Tax Refund Is Bad
Begin the TD1 Personal Tax Credits forms (one for federal and one for provincial tax withholdings). Instead of just claiming as single, take a look at last year’s tax return to see what you claimed on “Schedule One.”
Will anything change this year? Will you be getting married? Going back to school? Having a baby? All these circumstances can result in extra reductions to tax withholding requirements.
If you make RRSP contributions, have childcare expenses, carrying charges on investments or other significant deductible costs such as moving expenses or large charitable donations, complete form T1213 – Request for a Reduction in Tax Withholdings and send it to the CRA. They will give your employer permission to reduce your taxes at the source.
But don’t stop there. There are benefits available to employees under the tax system. Your employer may be open to negotiating for both cash and tax-free perks of value to you and your family. Some examples are discounts on merchandise, education costs for courses that benefit the employer, membership to fitness clubs, computers and communication devices, retirement savings, private group health care benefits and life insurance.
The following benefits are taxable, but worthwhile: Incentive and performance bonuses, stock options and profit sharing plans, interest free or low interest loans for investment purposes and travel benefits. These have different tax treatments, which can reduce your marginal tax rate.
It can pay to become tax aware if you have out-of-pocket expenses relating to your employment. Keep Form T2200 Declaration of Conditions of Employment signed by your employer in your files in case of audit.
The form states that these expenses have not been reimbursed and are required as a condition of your employment. Some examples you can claim are: automobile expenses such as interest or leasing costs and operating costs like gas, oil and repairs; travel expenses outside your metropolitan area; parking costs (but not at your place of employment); new tools for certain tradespeople.
Look for opportunities to split income with family members. Employees who are required to hire an assistant may deduct this cost. There is no rule that says this can’t be paid to your spouse or child. The amount must be reasonable for work actually performed. Keep all records.
If you pay GST/HST on union dues or professional fees or other claimed employment expenses such as travel, office supplies and vehicle costs make sure your apply for a refund.
When you have less tax taken from your earnings you can use the money to pay non-deductible credit card debt, pay down your mortgage, or contribute to your RRSP or TFSA. This is the best way for you to put more money in your own pocket all year long.
So stop sending the government so much of your money in advance. By minimizing the tax that’s withheld at the source, taxpayers will have more money to fund current wants and needs and can invest for the future.
The defined benefit plan (commonly referred to as a “gold-plated pension”) has been on the decline over the last two decades, but it still represents a fairly large sample of the Canadian work force.
While the media and financial blogosphere continue to debate whether the best savings vehicle for retirement is the TFSA or the RRSP, approximately 29% of Canadian workers still have the luxury of a defined benefit pension to fund their retirement.
What is a Defined Benefit Plan?
A defined benefit plan is a pension that is based on your highest average salary and the number of years of your pensionable service. This type of pension plan enables you to plan for your retirement because you can estimate your future pension income in relation to your salary.
The pension plan assures you a pre-defined lifetime income, regardless of capital market conditions and how long you live. The defined benefit plan is financed by employee and employer contributions, and by investment earnings.
The contributions to your defined benefit plan are tax deductible. Each year your pension contributions, and your Pension Adjustment (PA), are reported to Canada Revenue Agency on your T4 slip.
Your PA estimates the dollar value of the pension you earned in a particular year (based on a formula under the Income Tax Act) and determines the amount, if any, that you can contribute to an RRSP. Canada Revenue Agency will advise you of the maximum RRSP contribution you can make each year.
What’s so great about a Defined Benefit Plan?
According to a 2008 research study by CGA-Canada on the state of the Canadian pension system, private savings cannot outperform defined benefit pension plans. Here is a summary of their findings:
- Private savings done outside of retirement savings vehicles would hardly reach half of the benefits level offered by the defined benefit plan, particularly in the public sector. For this reason, declining defined benefit pension plan coverage is received as bad news to many.
- It is simply not possible under the current tax rules to generate or to mimic the benefits bestowed by public-sector defined benefit pension plans.
- Maximizing RRSP contributions does not lead to achieving a level of pension benefits similar to that of defined benefit pension plans.
- CGA-Canada contends that private savings would have to be undertaken outside of tax-preferred saving instruments to produce similar benefits.
What to expect in Retirement?
In a defined benefit plan, the employee will receive the specified monthly income for the rest of their life. Most plans allow for payments to continue to their spouse or common law partner and some may also allow for inflation adjustments.
For example:
Let’s take the case of an employee making $80,000 per year who joins a defined benefit plan at age 35 and retires at age 65. The terms of the plan are:
- the employee contributes 10% of annual salary
- at retirement he receives 2.0% x years of service x best-5-average salary
The contributions and benefits would be calculated as follows:
- $80,000 x 10% = $8,000 contributed per year
- 2.0% x 30 years of service x $80,000 (average salary) = $48,000 (in today’s dollars) per year throughout retirement
Assumption: $80,000 salary grows at rate of inflation but all values are stated in today’s dollars
Defined Benefit Pension: Not Guaranteed
A company may change the terms of a pension plan or type of plan offered. For example, in 2008 Sears Canada froze their existing defined benefit plan and introduced a new defined contribution plan.
For affected employees, any benefits accrued in the defined benefit plan when it was frozen remain in that plan until your retirement age. Any future contributions would be made to the defined contribution plan only.
A company’s bankruptcy may also affect pension recipients depending on the status of the plan at the time. If the plan is fully funded at the time, there should be enough money to continue paying pensioners and to pay out a lump sum payment to non-retired employees.
However, if the plan is underfunded, employees will receive less than the promised amount. In some jurisdictions, the government provides a guaranteed minimum income to retirees. For example, in Ontario, the Pension Benefits Guarantee Fund insures pensions up to $1000/month.
A Clear Winner in Retirement
Experts will continue the debate between the RRSP and TFSA as the best choice for retirement savings. And private sector employers will continue to shift towards the defined contribution plan in order to save money and pass along much of the risk and ownership of retirement savings to their employees.
A defined benefit plan is becoming increasingly rare to find, but for those 29% of Canadians who currently have the luxury of a gold-plated pension, there isn’t any doubt that retirement is looking pretty sweet.
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.)