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Tax Do's And Don'ts

In a perfect world, tax planning would be a year-round activity. In real life, however, most people are too busy trying to generate enough income to worry about taxes in the first place. Here are a few do’s and don’ts to focus on.

Don’t cash in those RRSPs. Losses of income or assets are usually temporary but missed opportunities for tax deferral are generally permanent. Tapping your RRSP savings to offset income shortfalls is a mistake. Your RRSP savings are not only tax-deferred, they can also be used on a tax-free basis to return to school under the Lifelong Learning Plan or to buy a home under the Home Buyers Plan. Don’t dip into your RRSP to impulse buy! If you really do need money to fund daily living costs, make sure that the lower income earner is withdrawing. Also, if possible, wait until January to get one more year of tax relief.

Do time your RRSP withdrawals better. In some instances, it does make sense to cash in RRSPs even if you don’t need the money. Older investors or someone facing a terminal illness may want to accelerate the process if they are currently in a lower tax bracket and are likely to be taxed more heavily down the road. They can reinvest the money more tax-efficiently in non-registered investments that pay dividends or capital gains. Don’t forget that net income levels affect not only your personal income taxes but will also affect fees for such things as nursing home costs, home care and meals on wheels.

Do make borrowing costs deductible. Unlike U.S. taxpayers, mortgage payments for Canadians are not tax deductible – so get rid of them! Try to pay off non-deductible debt such as credit cards and mortgages as quickly as possible. Then, if you must borrow, do so on a deductible basis: to purchase investments, income-producing properties or build your business.

Do educate yourself. Learn the difference between a tax deduction, non-refundable and refundable tax credits, and then be vigilant about claiming them every year. For instance, students who attend post-secondary school may qualify for tuition and education credits. Tuition fees in excess of $100 for part-time courses qualify, as do correspondence course fees if taken from a Canadian institution.

Do split income with family members. Qualifying child-care expenses can be claimed on your tax return during the year in which they’re paid. Consider paying your children who are 18 or older to look after younger children while you are at work earning an income. You’ll get a deduction and your adult child will be accountable for the income, probably paying little or no tax depending if they have another source of income.

Don’t lose track of RRSP room. Since 1991, RRSP contribution room is automatically carried forward from year to year indefinitely. As long as you reported earned income on your tax return, 18% of all prior years’ earned income since 1991 constitutes your total cumulative RRSP contribution room, less any RRSP contributions actually made and any pension adjustments that you may have received by participating in an employer’s pension plan. Individuals whose best-earning years are ahead of them may want to wait until they are in a higher tax bracket before contributing or alternatively, should they have immediate available savings, it is possible to buy now and claim later. Your annual Notice of Assessment provides you with a running tally of RRSP contribution room.

Don’t forget your home office. Provided that your home is your principal place of business or you use the space to earn income on a regular basis, you can deduct a percentage of your household expenses. Sample deductions include mortgage interest and property tax, as well as maintenance expenses, heat, light, and home insurance. The amount that can be deducted has to be proportionate to the space the office occupies in relation to the entire house. It also has to be a separate room, not a corner in the bedroom.

Do name your spouse as beneficiary on registered assets. When you die, the government considers you to have sold all that you own at fair market value. If those assets have appreciated in value, your estate will face paying tax on the capital gains. In leaving these items to your spouse you will avoid that sale at fair market value, thus allowing your spouse to defer the tax that might otherwise be due. You may also want to consider joint accounts with rights of survivorship for non-registered assets, thereby easing the transition upon death.

As always, if you have any questions or require assistance, please give us a call.

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