One Of Two Certainties In Life
Death and taxes are the two certainties in life, athough I am wondering if change should be added as the third. All one can ensure is that they only pay their fair share of tax and not a penny more based on the current tax legislation. There are plenty of ways that people can reduce their tax liability, it is just being aware of the mechanisms to do so.
Here are some helpful things I have encountered during my experiences of preparing and reviewing personal income tax returns, plus some other new things to consider. Even though tax season comes and goes each year, it is never too early to start planning how to keep more in your own pocket for the future.
Please note that these are general concepts and due to each taxpayer's situation being unique, further investigation should be pursued before the concept is implemented into your specific situation.
I will be making some additions to this page in the future. I will be putting the advice into PDF files once the page gets too much stuff in it (or as I say too busy).
The federal Conservative government has provided a nice little treatbag of tax cuts for Canadians over the past five years in their budgets. Ensure you are keeping aware of the new measures so you can claim what you are entitled to.
Save, Save, Save!
If you want to invest money. The federal government announced in the 2008 budget a new twist on savings with the introduction of the new registered Tax-Free Savings Account (TFSA). You can put money into this investment vehicle and withdraw funds out tax free unlike RRSPs.
The catch 22's are that you can only contribute up to $5K (maximum limit will grow by inflation level) per year and it started in 2009 but it is something to keep in mind. You will not receive a tax credit when you put funds into this account because you will not get taxed when withdrawing the funds. Also, the funds invested in the account can be used as collateral for a house. I am not sure if this will have a foreign content limit with this as of yet. We will have to see the fallout on that issue from our friends at the Canada Revenue Agency (CRA). To date the foreign content has not been challenged by the CRA.
Other issues are related to age. You must be over 18 years of age to invest in the tax free savings account but theire is no age limit compared to an RRSP. If you do not use up the maximum contribution limit in a year, it can be carried forward for use in the future. CRA is also tracking TFSA limits, which means you do not need to open any account at the bank until you want to put money into the TFSA. The annual contribution limit is at $5,500 for 2016 ($10,000 one time limit in 2015) and onward until the amount indexes another $500.
The tax lowdown for this compared to an RRSP is as follows. You should still invest in RRSPs first and then use the TFSA if you are expecting your income to increase in the future, use the TFSA first if expecting income to decline in the future. The TFSA can be used if all of the RRSP contribution room has been fully utilized. As you age, your income should become higher. I say this because the RRSP provides upfront receipt of the tax credit at what your present rate of tax is. The income earned in the RRSP will get taxed once withdrawn at a later age when income is being earned at a lower rate of tax compared to what tax rate was being incurred while contributions occurred at the earlier age.
The TSFA will provide a tax free vehicle to put money in once an individual reaches age 71 where they have to begin withdrawing funds (recognizing income) from a RRIF assuming the RRSP was rolled over to a RRIF. Another planning point to consider for married couples is having the spouse at the higher rate contribute to the RRSP of both spouses and have the lower income earning spouse contribute to the TFSA if the RRSP contribution limits are fully utilized.
As of July 1, 2009, if you live in Ontario, you can elect beneficiaries for your TFSA in order to transfer it tax free upon death or significant life events to the beneficiaies, which can yield significant tax deferrals (money in your pocket and not the governemnts).
One final point. The unused TFSA contribution room may come in handy for inheritence/estate planning purposes down the road while keeping more cash in your pocket instead of the government's.
Let The Computer Do The Work For You
Preparing your tax return does not have to be a manual process.
Consider using computerized tax preparation software. There are several options that range in cost from $10-50 and can allow for up to a certain number of returns to be prepared. These programs are very user friendly. They will walk you through the process of entering info and will diagnose if any tax filing advatnages exist. When chosing software, enusre it is compatible with Netfile.
E-filing (includes Netfile) you tax return is alot faster then filing a hard copy. Plus, it can reduce the possibility of error in the return on your's and CRA's end. If you think a refund is a strong likelihood, then an e-filed return can get the $ back in your hands within two to three weeks instead of six to ten for a paper filed return. Please note: that this advice assumes that CRA's systems are working properly, otherwise we are all SOL.
Using CRA My Account can enable you to see the status of your tax return. This is especially useful if you get reassessed for a tax year and wonder what is going on. Setting up the account takes about 10-15 minutes on Canada Revenue Agency's (CRA) web site. When doing so, ensure you have a copy of the most recent tax return you have filed. The only caveat is that once the account is setup, you are sent (how ironic-via mail) a security code to activate the account that has to be entered online.
If you are lucky enough to have kids then you should consider the following:
Let Your Kids Earn Their Keep
Parent's should consider transferring or lending income producing property to their children to reduce their tax liability. Any income or loss that a minor derives from property lent or transferred to him or her is included in the parent's income for tax purposes except for property that earns capital gains or income earned on top of the original income that is included by the parent. Parents with children under age six who receive the $100 per month Universal Child-Care Benefit (UCCB) or the $2,000 child tax credit should consider transferring this to a child. The income earned from the $100 per month or on the income from the $2,000 tax credit is taxed in the child's hands and not the parents. It is a good way to save money for the child's post secondary education.
Investing In Your Children's Future
An alternative or complementary strategy to put away money for your children is investing in Registered Educational Savings Plans (RESP). Contributions to a RESP aren't tax deductible, the investment earnings will accumulate on a tax-deferred basis. In addition, the government will pay a Canada Education Savings Grant (CESG) into the RESP subject to certain conditions.
Borrowing To Purchase RRSPs
In most cases, it makes sense to borrow funds in order to make RRSP contributions as the tax savings will exceed the cost of borrowing provided you are in a high enough tax bracket where investing in Registered Retirement Savings Plans (RRSP) is beneficial. The financial institutions will generally lend funds to you at a lower rate if you reinvest the funds into one of their RRSP products. If not, then a higher interest rate should be anticipated. This type of loan should have a very short amortization period (usually less than one year) in case you do this again in the following year. Unlike normal investments, the interest on a RRSP loan can not be deducted for tax purposes.
Defer Taxes Through Investing & Insuring Your Life
If you have reached the point of maximizing your RRSP contributions, another viable option to defer tax is using permanent life insurance products, such as a Whole Life or a Universal Life insurance policy. These policies usually have an investment component. Typically, the tax on the earnings from the investment component is deferred until there is a payout from the insurance company. Plus, you also have the comfort of having life insurance in case something happens to you. An additional benefit is that the permanent insurance provides the ability to borrow against your insurance policy assets at low interest rates.
Americans Living In Canada
If you hold United States citizenship be careful of the following:
1. You need to file a US tax return even if you are not residing in the US. US personal taxation is based on citizenship.
2. TFSAs are not tax free as they are considered to be taxable grantor trusts for US tax purposes
3. RESPs are not tax free as they are considered to be taxable grantor trusts for US tax purposes
4. You have to catch up taxes prior to renouncing US citizenship. Possibly 6 years of foreign bank account reporting (FBAR) and 3 ears of personal tax returns (1040s)
If you have any personal income tax related questions, you can e-mail them to me. Even I am not fully able to answer your question, I should be able to point you in the right direction.