Now that the deadline for filing personal 2009 income tax returns is passed, the last thing most Canadians are probably thinking about is their 2010 taxes.
Unfortunately, they should be.
“Over a lifetime, the amount of income tax paid by Canadians will exceed what they spend on food, shelter and clothing combined,” said Tom Hamza, president of the Investor Education Fund. “Taxes eat away at a person’s income and wealth, so it pays to be aggressive, not passive, about reducing the amount of tax paid. Paying (more tax) means taking longer to meet your financial goals.”
The first thing to do is to get organized to ensure that you get all the tax benefits and credits you’re entitled to.
“Start early and collect receipts in a box or envelope all year so they are in one place come tax time,” suggested Cleo Hamel, senior tax analyst at H&R Block. “You can even have a checklist on the front to remind you.”
Another good strategy is to review how much of your paycheque is withheld to pay taxes. Getting a tax refund means you paid too much tax and you actually were lending your money to Revenue Canada, which then returns it to you without interest.
Carefully complete your TD1 tax credit return form so that your payroll department can calculate the correct amount of withholding tax.
If you have other significant tax deductible expenditures, complete a T1213 request to reduce tax deductions at source form. The most common deduction that you can make so that you “pay yourself first” is through forced RRSP contributions. Because they’re made with pre-tax dollars, more is diverted toward retirement savings and less to the tax man.
Other deductions that may be claimed on the T1213 form include significant interest costs, rental losses, charitable donations and child care expenses, to name some.
A recent RBC poll found that most Canadian families are not taking advantage of child-related tax savings through registered education savings plans (RESPs), child care deductions, and child amount tax and child fitness credits.
An RESP is a flexible savings plan that allows money deposited for a child’s post-secondary education to grow tax-free until they attend university or college. The federal government supplements RESPs through the Canada education savings grant, which matches contributions by 20 per cent up to an annual maximum of $500 — or $7,200 over the life of a plan.
Upon withdrawal, the income is taxed in the child’s hands, so there should be little or no tax payable because the child likely will be in a low tax bracket.
“When you’re raising a family it’s important to stretch every dollar, and making the most of available tax savings can make a big difference,” said Patricia Domingo, an investment and retirement planner at RBC.
The medical expense tax credit is one of the most under-used tax breaks. It’s available only on expenses in excess of the lesser of $2,011 in the 2009 tax year ($2,024 in 2010) or three per cent of net income in a year. You can take the best 12 months as long as one of the months ends in the tax year.
“If you need to have major dental work or orthodontics or orthotics, try and plan them so you have the expenses in the same tax year,” Hamel suggested.
She recommends that you review your investment portfolio to ensure you have taken advantage of carry forward capital losses or gains that need to be realized.
As well, do some retirement planning. Review your tax plan for when you retire and make sure your investments are balanced so that both spouses will have about the same amount of income so taxes are split more equally. And consider opening a spousal RRSP to re-distribute your income.
If you run your own business, review your revenue and determine if incorporation might be a good idea.
Finally, don’t let once-in-a-lifetime savings pass by.
“Buying or building a first home, going away to school, saving for children’s education or becoming self-employed all offer unique opportunities for tax savings,” Hamza said. “By learning about these and other opportunities to save, Canadians can make the tax system work for a lifetime — from school days to retirement.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.