Make Tax Time a Family Matter
Working together can cut your tax bill more than you think.
Think about which expense takes the biggest bite out of your paycheque. Groceries? Your mortgage? If you’re like most people, the answer is income tax. According to the Fraser Institute, the average Canadian family handed over 43% of their income to taxes in 2017, more than what was spent on necessities like housing, food and clothing combined.1
The good news is a little bit of tax planning – now, and throughout the year – can help your family pay less come April.
Preparing to file your return
Paying less starts with getting organized at tax time so you don’t miss out on key credits and deductions.
Gather all relevant slips, including those stating your earnings, investment income and RRSP contributions. Reviewing your last tax return and notice of assessment can help you identify which documentation may be important again this year.
If you invest in taxable accounts, expect your investment firm to send you a listing of trades made so you can calculate your capital gains and losses. Don’t forget receipts for medical expenses, as well as donations to charity.
If you file electronically, remember to hang on to copies of all receipts to support your claims should the Canada Revenue Agency choose to review your tax return. But regardless how you submit, keep your paperwork for a minimum of six years, just in case the CRA chooses to revisit your file later.
Were you newly married or divorced in 2018? Did you have a child, move to another province or receive pension payments for the first time? Events like these can affect how you report at tax time.
Capturing tax benefits within the family isn’t necessarily restricted to you and your partner. Do you have a child who earned income last year, say through a part-time job? Encourage them to file a tax return, even if they have no tax owing. Their earnings will generate RRSP contribution room which they can take advantage of once they have taxable income.
Non-refundable tax credits: share so they don’t go to waste
Non-refundable tax credits aren’t paid out directly. Instead, they reduce the amount of tax owed. In recent years the government has done away with several tax credits including the children’s fitness amount, the children’s arts amount, as well as the federal education and textbook credits. The first-time donor’s super credit and the public transit tax credit have also been eliminated. That makes it more important than ever to use the credits that do exist wisely.
The problem with non-refundable tax credits is that once a taxpayer claims enough to shrink their tax bill to zero, remaining unused credits become worthless; they can’t automatically create a refund. Luckily, certain excess credits may be transferred to a spouse, common-law partner or other family members so they don’t go to waste.
Age amount – Line 301. Assuming you were 65 years of age or older on December 31, 2018 and your net income for the year was under $85,863 you can claim the age amount. Any excess credit you don’t need may be transferable to a spouse or common-law partner.
Pension income amount – Line 314. You may be able to claim up to $2,000 if you report eligible pension income. What’s eligible depends on your age. For example, if you’re under 65, a company pension qualifies. At 65, RRIF payments can be included. If you received qualifying pension income in excess of $2,000 you can transfer up to $2,000 more to your spouse so you can both fully utilize the credit.
Disability amount (for self) – Line 316. Any part of the disability amount you can’t use can be transferred to your spouse, common-law partner, or another supporting person under certain conditions. Also, review the Canada caregiver amount (Line 367) concerning children under 18 with disabilities.
Tuition amount – Line 323. The maximum amount transferable to your spouse is $5,000 minus any amount claimed on your own return (you can’t transfer credits carried forward from a previous year). A child can also transfer their unused tuition amount to a parent or grandparent. Note that although the education and textbook tax credit is no longer available, carried forward amounts can be claimed for 2018.
Spouse or common-law partner amount – Line 303. On top of the transferable tax credits, you may also claim the spouse or common-law partner amount if your partner’s net income for 2018 was less than $11,809 ($13,991 if you’re entitled to the Canada caregiver amount).
Pool expenses and save
Some expenses can be combined and claimed by either you or your partner to generate greater tax savings.
Take for example, the charitable donations tax credit (Line 349). If either of you donated $200 or less last year, consider pooling your donations to maximize the credit. On portions over $200, federal tax savings jump to 29% from 15%2. Short of the threshold? Go back as far as five years and combine unclaimed donations, or, carry forward donations to use in the future.
When calculating the medical expenses tax credit (Line 330 and 331), you can only claim qualifying medical costs for you, your spouse and children under 18 that, when totalled, exceed 3% of your (or your partner’s) net income, or $2,302, whichever is less. That’s why it’s usually smarter for the lower-earning spouse to claim the credit since the dollar threshold for qualification is easier to reach.
Although you can’t claim medical expenses you’ve been reimbursed for, you can choose any 12-month period ending in 2018 that’s most advantageous. So, if you had an especially large dental bill in late 2017 that you haven’t claimed, report it to get the most out of the tax credit.
While you may have provincial taxes to pay, there are also provincial credits that piggyback on federal ones, including the age amount, medical expenses credit and tuition amount. Don’t overlook these.
Claiming child care costs
Do you regularly pay for child care? Many of those expenses may be tax deductible.
In general, the child care expenses deduction (Line 214) allows $8,000 in qualifying expenses to be claimed per child under age 7, with the maximum lowered to $5,000 for those aged 7 to 16 years. Depending on the circumstances, as much as $11,000 in care costs may be claimed for a disabled child.
Because child expenses are eligible for a tax deduction rather than a credit, they reduce tax at an individual’s marginal rate. Normally these expenses must be claimed by the spouse with the lower net income.
Note the Canada Child Benefit is now indexed to inflation.
More tax-smart strategies for families
Equalizing your and your partner’s taxable incomes can go far in reducing your collective tax bill, while making it less likely income-tested tax credits and government entitlements like Old Age Security will be lost. But getting there may require reorganizing your approach, particularly if there’s a substantial gap in assets and income between you. Here are a few tax-friendly strategies to let you do just that.
Share pension income. If you’re already retired, you can transfer up to half of your eligible pension income to a lower-income spouse to help you cut tax now. Eligible pension income is anything that qualifies for the pension income tax credit.
Separately, Canada Pension Plan benefits may be split equally with your spouse, or you may share up to half of your payment if you alone are receiving CPP. Just remember you can’t do the same with OAS.
Contribute to a spousal RRSP. Spousal RRSP contributions reduce taxable income the same as RRSP contributions made to your own plan. Besides being a valuable tool to build your partner’s nest egg, a spousal RRSP can help you split income in retirement and reduce your household tax bill, especially if you plan to retire earlier than age 65 and don’t have a pension, or, you wish to allocate more than 50% of your pension income to your spouse.
Help grow your partner’s TFSA. While you aren’t allowed to make direct contributions to your spouse’s TFSA, you can give them funds to contribute to their own plan.
Claim your spouse’s dividend income. If your partner collects dividends and their income is too low to fully utilize the dividend tax credit (Line 425) explore the option of transferring their dividend income to you. Although your reported income will now be higher, as a couple you’ll be able to make better use of the dividend tax credit. Alternatively, consider ways to boost your spouse’s taxable income to help them use more of the dividend credit themselves. For example, they can postpone claiming tax credits which can be carried forward to a future year (e.g. donations).
Have the higher income spouse pay expenses. It’s usually a good idea to structure your finances so the higher-earning spouse pays living expenses, leaving the lower-taxed partner extra funds to invest.
If you’re a business owner, be aware of changes to tax on split income (Line 424). In addition to TOSI applying to certain types of income of a minor child, TOSI may now affect amounts received by adult individuals from a related business. Income subject to TOSI must be added to the individual’s net income to calculate various deductions, credits and benefits.
Make tax planning a year-round activity
Want a smaller tax bill next year? Then take steps throughout the year to pay less.
At BlueShore Financial our advisors and their team of specialists will examine all your tax-saving options to help you keep more of what’s yours. Speak with your advisor today.