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A Christmas list of good deeds and (equally important) tax benefits

Having lived through commercial Christmas frenzy for so many years, consumers are maturing, slowly but surely. We no longer desire gifts that will merely please, but rather favor ones that will be financially sensible and socially responsible. We want to be generous to others and smart with our own budget. We’d like to give joy and receive some financial or tax benefits at the same time.


Beyond tax filing deadline

April 30 has passed and once you cut a cheque to Canada Revenue Agency or received a refund, it’s time to put your tax worries to rest until next year. Or is it to the contrary? Well, if you really want to maximize your after tax returns on all your earnings, you do need to plan well head of April each year. Here are several tips that will help you being prepared and making smart choices.


Charitable donations tax credits

If you support charities, you are better off claiming the tax credit on amounts over $200. If you donated less that $200, your tax break will be calculated as 21% of the donated amount. However if you combine your unclaimed charitable receipts from up to 5 years and claim them in one year, any amount over $200 will receive a 40% tax break.


Attention parents!

This September Ontario government announced a new refundable tax credit for children’s extracurricular activities. It will be broader in scope than the federal credit. Not only will the physical activities qualify, but also a broad range of other programs such as: music, drama, dance, visual arts, language, and tutoring. The tax credit will be up to $50 per child under 16, based on maximum of $500 fees paid. Although at this stage the new tax credit is still subject to legislative approval, it is worthwhile to keep the receipts from 2010.


Deductions from self-employment income

As we have just lived through one deadline of April 30 for all individual taxpayers, we are now facing another one of June 15 for all self-employed. If you are a sole proprietor or a professional working independently, you and your spouse enjoy extended tax filing deadline of mid-June. However, according to some very advanced logic, if you have a tax payable you still need to pay it by April 30, even though you may file by June 15. This means that you will not be charged penalty for non-filing until June 15, but the interest will accumulate on outstanding balance from April 30.


Employment expenses

Today’s employers shift more and more expenses on to employees – whether using computer at home, travelling to meetings with clients, using small supplies, or paying for promotional events. From journeymen, to financial advisors you may find yourself in a situation where your employer does not reimburse you for part or all expenses related to your work.


How to access RRSP funds without paying tax?

Just a few weeks after RRSP contribution deadline for the 2010 tax year, many of us are struggling with the mixed feelings. Yes, we contribute to defer our taxes and save for retirement, but worry that the funds are locked in poorly performing investments to which we have no access unless willing to pay tax immediately. Should we continue this annual routine of stashing all our extra savings to lower our taxable income, or perhaps use the money for more current needs?


Income splitting

If you are a business owner and have family members with low or no income, you may choose to employ them in your company. You can then pay them a salary that will be taxed in a lower tax bracket. This year, income up to $10,300 is tax free (except for CPP premiums). Children younger than 18 years of age, will not pay CPP. As long as salary paid to family members is reasonable, i.e. comparable to what you would have paid to a non-relative, this is an effective way of reducing your business income.


Incorporate or not

If you are a self-employed small business owner, you may wonder whether it would be more beneficial to perhaps incorporate your operations. We’ve gathered the most frequent questions about incorporation hoping that answers to them will help you make a decision whether to incorporate or not.


Investing for young children

One of the few ways to split income with children under 18 years of age is to purchase investments in their name (and on the separate account) that would produce capital appreciation, but not income such as interest or dividends. Therefore, if you purchase shares of a company that does not pay dividends, and subsequently sell them, the capital gain you will realize will be taxed in your child’s hands. However, if you choose GICs to be registered in your child’s name, the interest income will be attributed back to you.


Most often forgotten claims on your income tax:

  1. Legal fees – paid in divorce proceedings to obtain rights to support payments (child or spousal)
  2. Investment fees – paid for investment advise, portfolio management, accounting services and safety deposit box if you generate significant passive income
  3. Professional fees – annual dues paid to professional organizations, trade unions and the like
  4. Infirm dependants– credit for caring for infirm relatives who have low income
  5. Elderly dependants – credit for caring for elder relatives who live with you
  6. Public transport passes – payments for monthly or weekly passes
  7. Medical premiums –paid to a private health plan either directly or through your employer
  8. T2202 – tuition and education credits that can be claimed in a tax year, carried over to future years, or transferred to a parent.

If you think that you may have omitted one of these important deductions or tax credit claims, consider filing an adjustment for up to 10 years back.


Private Health Plans

If you contribute to a private health plan through your employer you can claim your contributions as medical expenses. The amount you contribute sometimes appears in box 85 on your T4 slip, but many employers do not report it. You should check your pay stub from the last pay period of 2008 to see how much you contributed throughout the year and claim this amount on your income tax.


Property Tax Grants for seniors

Seniors whose properties appreciated in value and saw huge property tax increases over the years may find some comfort in the new initiative introduced through Ontario Senior Homeowners Property Tax Grant. In addition to regular Ontario tax credit available to those who pay property tax in Ontario there will be a new grant available for individuals 64 years of age or older. Senior couples whose family income is no more than $45,000 a year and who pay property tax will receive the maximum amount of grant. Single seniors with income of up to $35,000 will also enjoy the maximum amount of grant. Those with incomes over $60,000 per senior couple or $50,000 per single senior will not be eligible for grant. The application for grant will be made through your income tax package, so remember to tell your accountant how much you paid in your property tax.


Reporting Foreign Properties on Your Tax Return

If you carefully review your tax documents, on the very first page of the tax return form there is a question: “did you own or hold foreign property at any time in the year with a total cost of more than $100,000 CAD? “ If you hastily answer “NO”, think twice, especially starting in 2014 tax year.

CRA begins to place an increased emphasis on foreign reporting, primarily to target international tax evasion and aggressive tax avoidance, but at the same time affecting all taxpayers, even with moderate portfolios and less significant assets. Here is a brief look at who is affected and what needs to be reported.


Severance packages recipients

Loss of a job is always a dramatic experience. Your employer may recognize your services to the company and pay you a so-called retiring allowance on termination. However, you will end up with a significant tax bill, since such lump sum payment will attract tax at your marginal rate, which will leave you with only a portion of severance package in your hands. If you do not need the money immediately, you can consider contributing your retiring allowance to your RRSP. But remember, it has to be done as a “rollover”, which means your retiring allowance has to be designated as an RRSP contribution and paid directly into your registered account by your employer. What if you do not have sufficient room in your RRSP to contribute? There are rules that allow you to “create” additional RRSP room by the payout of retiring allowance. For every year of service before 1996, you will create additional $2,000 in your RRSP room. For every year before 1989 you may get additional $1,500 in RRSP room, on the top of the extra $2,000. You can structure your severance package pay out in such way as to take out portion of the money to live off, and rollover the reminder to RRSP to get a larger deduction for income tax purposes.


Swapping personal loans for investment loans

If you are holding a personal mortgage, have debt on credit cards and at the same time are poised to invest on the stock market, you are better off to pay some of your personal loans and take an investment loan to purchase shares. The interest on such loan will become tax deductible unlike interest on mortgage or credit card.


Tax and pleasures

For many professionals and self-employed individuals warmer weather means adding some fun (read: customer appreciation) to their business life. If you think golfing, yachting, dining and traveling, you are not alone. Canada Revenue Agency (CRA) has its own opinions on what’s deductible and what’s not. Here is the scoop:


Tax Free Savings Accounts

It’s been nearly two years since the introduction of tax free savings accounts (TFSA). Early adopters opened such accounts already, whereas others still consider setting one up. With the end of the year approaching, we’ll take a closer look at TFSA, should you wish to consider it as part of your investment strategy in the new year.


Utilizing capital losses

All those who realized significant losses on the stock market will be interested to know that they may be able to use such losses even in absence of capital gains this year. This only applies to investors who actually sold their investments, and not those whose portfolios deteriorated “on paper”. Although it is true that capital losses can only be applied against capital gains, they do not have to be utilized in the year when they occur. There are carry back rules that allow capital losses to be applied to capital gains from up to 3 previous years. So if you had to pay tax on those capital gains you enjoyed in better times, now it is the time to ask Canada Revenue Agency for some money back. When filing your current years income tax, remember to request a capital loss carry back to the selected year or years in which you had capital gains. This is likely to result in a tax refund.