March 15, 2013

Achieve Tax Balance & Increase Cash Flow

Filed under: Taxes — MikeT @ 4:54 pm

For many Canadians, filing a tax return is a day of reckoning. In 2013, April 30 is circled in red on the calendar of those Canadians who are not self employed and June 15 for those who are. However, with careful tax planning throughout the year these dates could be celebratory affairs that validate the actions and decisions that are made during the year.

While many Canadians like to get a tax refund, few recognize that a refund essentially represents an interest free loan made out by you, the taxpayer, to the federal government. On the other hand very few Canadians want to pay more tax than they already do. One reason for this is that if additional tax is owed upon filing a tax return, it may necessitate the requirement to prepay tax going forward in the form of quarterly installment payments. (Note that quarterly tax installments are required when tax owed is estimated to be more than $3,000 in the current year, and tax payable in either of the two preceding years has been $3,000 or more.)

The challenge, then, is in achieving “Tax Balance”, a term that essentially means finding the right mix between tax payable and tax refundable. Some strategies to consider are:

Reduce Income Tax Payable at Source

When RRSP contributions are made through payroll deduction, income tax remittances can usually be reduced. An ideal way to do this is through a Group RSP as contributions to these plans are made on a pre-tax basis.  Those whose employer does not provide a Group RSP may still apply to have their RSP contributions accounted for at source by completing “T1213 Form” to reduce tax deductions at source.  This form may also be used to account for child care expenses.

Another way to increase your take home pay is to complete and provide your HR department with form “TD1 Personal Tax Credit Return”. This form takes into account tax credits such as the basic personal amount, child amount, spouse or common law partner amount, caregiver amount, and tuition and education amounts, along with other factors. Completing it will enable you to receive the benefit of these tax credits throughout the year as opposed to waiting to file your tax return.

Canadians also often overlook the following tax deductions and tax credits. 

Medical Expenses

Eligible medical expenses are perhaps the most overlooked tax credit, as many don’t believe that claiming them is worth it. However, eligible medical expenses can be found everywhere and include prescription glasses, dental and drug expenses for you, your partner, and your minor children. In order to claim medical expenses your total expenses must be more than the lower of either 3% of your net income or $2,109. Your medical expenses are claimed on line 330 of Schedule 1, while the medical expenses for other dependants are claimed on line 331. These expenses can be claimed for any 12 month period ending in the current tax year as long as they were not claimed in the previous tax year.

Disability Tax Credit

The disability amount is a valuable non refundable tax credit that taxpayers with disabilities can use to reduce the amount of income tax that they have to pay. In order to be eligible, a medical professional has to fill out and sign the “T2201 Tax Form”, the Disability Tax Credit Certificate, and the Canada Revenue Agency has to approve the application. The credit may also be shared with a spouse, common-law partner or dependant, in circumstances where the full amount of the credit does not fully eliminate tax payable. Additionally if you have had a disability for some time, your tax returns can be reassessed as far back as 10 years.

Family Caregiver Amount

Available for the first time in 2012, the family caregiver tax credit is a 15 per cent non-refundable tax credit on an amount of $2,000 that provides tax relief to caregivers of infirm, dependant relatives. This includes, for the first time, infirm spouses, common-law partners, and minor children.  It is also not a standalone tax credit, as it also includes enhancements to the calculation of other dependency-related credits.

Moving Expenses

If you’ve moved to a new location that is at least 40 kilometers closer to your new job or post secondary educational institution you can claim a tax credit for your moving expenses. Note that eligible expenses could include the commissions you paid to your realtor when selling your old home.

Carrying Charges

One of the most overlooked tax deductions are carrying charges. Deductible carrying charges or investment expenses include the following as well as interest, if the cost has been incurred in order to earn income from your investments:

  • Safety deposit box fees - note that the 2013 federal budget proposes to eliminate the deduction associated with this carrying charge.
  • Fees paid for the management of your investments.
  • The cost of having your tax return prepared, only if you had property or business income and you did not use the cost to reduce your business or property income.

Charitable Donations

Small donations to eligible charities can add up over the year as charitable donations, receive a 15% federal tax credit on the first $200 (worth $30) and a 29% credit on donations in excess of $200, up to a maximum of 75% of income in the current tax year. Consider optimizing charitable donations by combining the donations made by each spouse on one return.

Achieving “Tax Balance” is a constant strategy that must be continuously reviewed and evaluated, while it requires a significant amount of time throughout the year, doing so can have positive effects on cash flow and prosperity.

Comments are closed.