Please note: This article will not go over advanced tax topics. Rather, it serves as a guide for rudimentary tax issues more focused on basic tax returns, such as those fitting the profile of students and young professionals. Please speak to your accountant/tax consultant/other expert, before making any decisions on your taxes based on this entry. Also note that all figures and numbers used are subject to change as determined by the Canadian Revenue Agency (CRA), such as tax brackets. All examples used are purely for illustrative purposes and do not necessarily denote actual tax planning and strategies used.
From the preparer’s point of view, here are a list of items you should keep in mind:
- Create a summary for your accountant so they know what they have. This is especially important if you have an unincorporated business or a rental property;
- Please provide receipts for everything that you claim:
- Investment income? Be sure to contact your broker to get their tax package (a lot of the time wasted is spent contacting your advisor/ getting you to obtain this information);
- Paid rent? Get a signed rent receipt from the landlord saying how much rent, location, and for what period of time you were living there;
- Tuition? Remember to print the T2202A. If studying overseas, provide a TL11;
- Transit passes? Remember to keep and provide them.
- Ensure the package is complete before submitting it. It is more efficient for the preparer to have all necessary information available at the time of preparation rather than receiving in piecemeal;
- Inform your preparer of any changes or possible missing information;
- Do your tax returns every year. Even if you don’t have taxes, you’ll need to file a T1. If that’s not enough of a reason, you could be missing out on free credits such as the Ontario Trillium Benefit, which gives you a credit if rent or property tax was paid during the year. Why miss out on “free” money?
How is income tax calculated?
The Canadian tax system is based on brackets where different income thresholds are subject to different levels of tax. For example, at the federal level, the first ~$44k you make is subject to a tax rate of 15% whereas if you make over ~$136k then that income is subject to a 29% tax rate. By this point, your taxes payable will be at least $28,837, federally. Many tax planning strategies incorporate the use of brackets to minimize overall taxes payable.
Please refer to: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html for more information about federal and provincial brackets.
What the difference between a credit and a deduction?
- Deductions go against your taxable income (i.e. the basis for which your taxes are calculated)
- Credits go against your taxes payable
- Deductions can usually be items that you can discuss with your tax planner to see what can be claimed, whereas credits usually arise from things you would do during your day to day activities during the year, such as get medication, take public transit, make a charitable/political contribution etc.
- The first credit that every taxpayer is entitled to is the basic amount of $11,038, meaning that if you make less than that amount you won’t have any taxes payable.
- If you’re living with your significant other for over 1 year, then you are considered to be “Living common law,” which essentially makes you married for tax purposes
- Why is this important? Married individuals can share their basic credit with their spouse. For example, if I had no income but my spouse was making $54k, I can give my entire basic amount of $11,038, which puts them in the lowest bracket as opposed to being in the second lowest and saves them taxes of roughly 15% x ~$11k = $1,650
- Furthermore, if you have children, you can claim other amounts such as the Universal child care tax benefit, day care expenses, children’s arts amount, and children’s fitness amount
New to the country?
- Residency is how the CRA determines if you are subject to Canadian tax rules
- If you are in Canada for over 183 days in a calendar year, you are considered to have “sojourned” in Canada and therefore, a resident who must file a T1 for that year.
- Even if you have spent less than 183 days in Canada in the year, if you moved to Canada with the intention of staying, you are considered to be a resident from the date you arrived until the end of the year
- Visa students should still file a T1 to get HST and the Ontario Trillium Benefit credit (if rent was paid). Apply for an ITN (Individual Tax Number) via form T1261 in order to file. Note, however, that these credits are only available if you are considered “a Canadian resident”, which then also subjects you to Canadian tax on worldwide income.
Leaving the country?
- On the oppose end of the spectrum, if you’re leaving the country, you still might be considered a resident for CRA purposes
- In order to not be considered a resident, you need to cut your ties with Canada
- Some examples of this would be to surrender your health card and driver’s license, and/or sell off all property in Canada. You’ll need to take active steps to ensure that your ties stay cut off
- Be aware that sojourning rules also apply here. If you return to Canada very often (i.e. cross border commuter for work) you may still be considered a resident
- Tuition credits can be transferred to your parents/grandparents or even your spouse/spouse’s parents/grandparents, up to $5,000
- Very often, tuition credits are elected to be transferred to the student’s parents since the students are not making sufficient income to make full use of the credit
- Some students will want to keep the credit, which I advise against
- Why? For tax purposes, treat your family as a tax paying unit. Shifting the credits to your family is more beneficial to the overall tax paying unit than to the individual student tax payer.
- Credits can be banked/saved until you have a tax payable. They don’t expire before that.
- Always remember to download/print a copy of the T2202A slip from your post-secondary institution to give to your tax preparer
- Medical credits are calculated as:
- Total medical expenses LESS either $2,152 OR 3% of your net income (whichever is less)
- This makes having less income advantageous in this situation
- What counts as a medical expense?
- Remember to keep a copy of all medical receipts
- Donations can be claimed up to 75% of your net income
- This makes donations more advantageous for higher income earners
- Donations in excess of $250 produce a much larger credit than the first $250 claimed in a year
- Donations can be carried forward up to 5 years and applied against any of your T1s during that time
- It may make sense to accumulate donations for a couple of years, to claim more than $250 at once
- First-time donor’s super credit
- First time donors are eligible for an additional benefit if neither you/your spouse have claimed any donations in any year after 2007
- The super credit is a 25% increase to donations in ONE tax year from 2013 to 2017
- It applies to any cash donation after 2013, up to a max of $1,000
- Be sure to keep a copy of your donation slips
RRSP vs TFSA vs Company Pension Plan
- RRSP (Registered Retirement Savings Plan)
- Your contribution room is 18% of your earned income from your previous tax year (yet another reason to file your taxes)
- Contributions are tax deductible and can be made on behalf of a spouse
- Excess contributions are taxed
- Unused contribution room carries over
- RRSP withdrawals are taxed normally. Never make an RRSP withdrawal if you can help it. It would be more worthwhile to take out a line of credit, where the interest would be less than the taxes.
- TFSA (Tax Free Savings Account)
- $5,500 limit every year and unused limit carries over, as well as any withdrawn amounts in previous years
- Any income or capital gains made in the TFSA are NOT taxable, but you can’t claim any losses
- Company pension plan
- This option won’t be available to everybody
- Usually company pension plans include contribution matching from the employer. If the plans are managed properly, there should be a steady growth
- Analysis: If a company matches your contribution, it’s very much worthwhile to contribute as much as possible. RRSP’s are an easy tax planning strategy to bump yourself to a lower tax bracket. TFSA’s are good if you might need to access the funds prior to retirement, and if you are in a lower tax bracket (i.e. the RRSP deduction will not save you very much). You can invest in the same things in your RRSP or your TFSA, so either way, you should consult an investment advisor to determine the most appropriate investment strategy.
- Based on types of income (dividends, interest, capital gains)
- Interest income is 100% taxable
- Capital gains are 50% taxable.
- Capital losses can be carried back 3 years or forward indefinitely to deduct against capital gains
- Dividends have their values increased (grossed up) and then a dividend tax credit is applied
- The reason why is not relevant for our presentation today (for the curious: it’s to integrate taxation such that it makes no difference whether a corporation or an individual is receiving the underlying income)
- For our purposes they’re 100% taxable, but at a lower rate than interest
- Remember to have a copy of your T3, T5, and other investment documentation from your broker