Personal Tax Tips
Note: This Page Is Constantly Being Updated And Expanded
The following tips and statements are very general in nature and in no specific order. Please contact your professional advisor before implementing any tax planning arrangements. Also, see the note at the bottom of the page.
In general, every taxpayer has the right to legally arrange his/her affairs, using provisions of the law, in order to pay the least amount of tax.
- Accelerate personal tax refund – if expecting a personal tax refund – use Efile or Netfile to accelerate refund (usually within 2 weeks vs. four to six weeks for paper-filed returns).
- Enhance your monthly cash flow – if you are expecting a tax refund upon filing your personal return, this basically mean excess income tax withholdings were made throughout the year by your employer, thereby reducing your year-round cash flow and investment returns. To avoid this, request permission from CRA for reduced source withholdings (a letter will be provided by CRA and submitted to your employer). A written request can be done at any time but best done just prior to the following calendar year (i.e. request in Oct-Nov 2001 for the following calendar year, 2002). This applies when you are aware of certain deductions you will have in the next calendar year, such as RRSP contributions, child care expenses, charitable donations, alimony & maintenance payments, medical expenses, etc.
- Tax losses should be carried over (back up to 3 years or forward up to 7 years and 10 years effective Year Ends after March 22/04) against high tax rate income – therefore carrying back to currently obtain a refund is not necessarily your best choice if prior years’ income was in a low tax bracket but future years’ income is expected to be in a high tax bracket.
- Use your own car for work – in most cases, due to the nature of calculations of taxable benefits, employees are better off using their own car for work purposes and obtaining an allowance or reimbursement for such use from the employer, rather than having an employer provided vehicle.
- Reduce the family tax bill – split income with family members such that income is moved from a high income earning family member, taxed at a high tax bracket, to a lower income earning family member who is taxed at a lower tax bracket. However, beware of the attribution rules whereby certain transactions attempting to pass income to lower income earning family members will result in the income being taxed back in the high income earning member’s hands. See tips no, 6 to 12.
- Personal living expenses, such as mortgage, rent, utilities, clothing, food, etc. should be paid for by the higher income earning spouse, such that any excess family income is invested by the lower income-earning spouse – lower-income earning spouse earns investment income taxed at lower tax rates (each spouse’s income should be kept separate).
- Gift or lend money/assets to your children under 18 years of age (or to a trust established for them, in order to maintain control over the assets) for investments generating capital gains (not interest or dividends which attribute back).
- Gift money/assets to your adult children for earning investment income of any type (capital gains, interest, dividends, rents, royalties, other property income). To maintain control over the assets, a trust may be established for their benefit.
- Lend money to your spouse or children for investment and charge interest (lower of CRA prescribed rate, currently 5%, or current commercial rate) – this works well when interest rates are low and expected to increase as the interest rate on the loan is locked in but the interest earned on the investment is expected to rise, leaving investment margin to be taxed at a lower tax bracket. Ensure the interest on the loan is paid by January 30 following any year that the loan is outstanding. The loan should be properly documented with a promissory note noting the parties involved, the amount of the loan, the date, the interest rate, the method of interest calculation, and the terms of repayment of principal and interest.
- Lend money to your children (or an irrevocable trust for them) for long-term investment – capital gains will not attribute back to the transferor, therefore, invest in assets with a low current yield but good appreciation potential. Any income will attribute back but the eventual capital gains will be taxed in the children’s hands.
- Family members (spouse and kids) and/or trusts for the benefit of family members should be shareholders of your corporation, to minimize tax on dividend distributions. However, beware of the kiddie tax !
- Canada Child Tax Benefit payments should be accumulated in a separate bank account for the minor children. These funds can be invested without attribution.
- Pay your adult children for babysitting or for helping in a move. Costs are generally deductible to you (subject to limitations) and taxed in the child’s hands as earned income. This also creates RRSP contribution room for the child.
- Contribute to a spousal RRSP (Registered Retirement Savings Plan) – you are entitled to the current deduction but upon retirement, your spouse will be taxed on withdrawals – thereby splitting income upon retirement.
- Child care expenses should be maximized by reporting all of your children, up to age 16 in the year, on your return, even if no expenses are incurred for some of them – this is because the expenses are not limited on a child by child basis, rather the total deduction for child care expenses is limited (among other limitations) to the total of number of children that you have multiplied by the maximum deduction for each child.
- Medical expenses should be claimed by the lower income-earning spouse. In addition, pick any ’12 month’ period ending in the year, rather than a calendar year, in order to maximize the claim.
- Maximize your RRSP contributions if you have RRSP contribution room – also, invest throughout the year, rather than at deadline to maximize returns and average the cost of investment.
- Invest early in RESPs (Registered Education Savings Plan) and take advantage of the Canada Education Savings Grant (CESG) (20% grant paid into the plan on contributions up to $2,000 per child per year), in order to maximize savings for post-secondary education for your children. Current contributions are not deductible, however, the investment income earned within the plan is accumulated free of tax and will be taxed in the student’s hands when he receives the funds from the plan to attend university.
- If cash flow is required during period of unemployment, maternity leave, disability leave, etc. consider withdrawing from your RRSP – this is effective when you’ve contributed in the past and obtained a deduction at a high tax bracket and current withdrawals are kept to a minimum so that no or little tax is payable on the withdrawals (though there will be withholding of tax by the financial institution, any excess will be refunded, upon filing a tax return for that year)
- Consider an estate freeze of your assets in order to pass future growth of these assets to the next generation, take advantage of the enhanced capital gain exemption on private corporation shares, estimate your tax liability upon death and set up appropriate life insurance to cover estimated tax, maintain control over the assets, and creditor proof your assets.
- Children earning income should file tax returns even if not subject to tax – earned income builds up RRSP room. Once they turn 18, they can contribute to CPP and build up CPP eligibility. Also children over 18 or 19 may qualify for certain provincial or GST tax credits.
CAUTION: The above information is very general in nature and not regularly updated, therefore may not reflect recent legislative or judicial proposals and/or changes. Tax laws are extremely complex and frequently change. In addition, each situation is unique and must be individually analyzed in light of its specific facts and circumstances of the particular situation and interpretation of the relevant legislation enacted at the time. The information above should not be acted upon without seeking professional advice. For more information and detailed advice about any of the above or the implementation of other tax planning arrangements, please contact your professional advisor.