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20 Ways to Save Taxes
1. Take maximum advantage of charitable donations.
These tax credits are claimed in two stages: 17% of the $200 donated, and 29% above $200. It’s best to consolidate charitable donations on one spouse’s return. If you can’t take maximum advantage this year, you can carry forward your donation claims for up to five years.
2. Take advantage of the disability tax credit.
A documented drastic change in personal health can cause eligibility for disability tax credits. The exact amount is based on combined federal and provincial rates. Technically, the disabled person must claim the credit first, but if he or she has very little income, the credit can be transferred to the supporting person. The credit can also be used in the year a person dies. Be sure to get the attending physician to complete Form T2201.
3. Calculate the medical expenses credit in the most advantageous way.
This credit is linked to income. Only expenses exceeding three percent of your net income, or $1,614 (the lesser amount) are eligible for a credit. The lower income-earning spouse should claim the credit. You don’t have to claim the medical expenses in the same calendar year. Expenses can be claimed for any 12-month period ending in the taxation year.
4. Claim eligible medical expenses.
The list of eligible medical expenses is long and includes such expenses as home renovations to accommodate disabilities. Get a copy of Revenue Canada’s bulletin IT-519R and check it against your expenses.
5. Look for allowable business investment losses.
You may claim up to 50% of your investment as an allowable business investment loss (ABIL). The Income Tax Act allows you to claim capital losses on worthless shares, or bad debts, of a small-business corporation. All you need is a cancelled cheque and a detailed form provided by an accountant. You may have to prove why it’s unlikely you’ll ever be repaid. But file your ABIL with your tax return now, rather than requesting an adjustment later. Make sure your proof is available in case of an audit.
6. Calculate your true capital gains or losses.
CRA requires a calculation of the average cost base of your taxable capital gain. Because it is easy to miscalculate your true capital gains or losses when you buy and sell shares over a period of years; keep good records of your investments, especially if you have multiple investments accounts, so you can accurately calculate your cost base.
7. Properly match investments to deductions.
To retain an investment deduction, you must be able to prove you immediately reinvested the proceeds of any sale in another allowable investment. If the investment is sold, and you still have the loan, you can’t write off the interest. Keep good records so you can prove you have a qualifying investment to support your claim.
8. Account correctly for expenses on rental properties.
Some expenses must be prorated (capitalized) and others, such as minor repairs and mortgage interest, can be claimed in their entirety in the year performed. As usual, keep good records and go through the expenses line by line to claim as many expenses against the rental income as possible.
9. Separate capital gains from income.
It is tempting to treat all share transactions as capital transactions to trigger capital gains or losses, but CRA has a rule to tell the difference. Any gains (other than interest or dividend income) are taxed as capital gains, and any losses are considered capital losses, but it may be a different case if you churn, or buy and sell shares rapidly and repeatedly. You might be classified as a trader and be taxed at a higher marginal rate. Consult a tax specialist if you trade rapidly.
10. Report income earned by offshore assets.
You must report interest earned outside of Canada. If you don’t report it, you are subject to a penalty, plus interest charges.
11. Look for deductions.
These include interest expenses, investment counsel fees, safety deposit box fees, accounting fees, professional dues, alimony, and child-care expenses and maintenance. Watch out for when the expenditures can be claimed.
12. Sell losing investments.
Selling losers should fit in with your overall investment strategy. This could reduce your tax liability for the year. Be aware that if you or your spouse acquire identical investments within 30 days before or 30 days after the date of sale, the loss will be denied.
13. Buy mutual funds before a distribution (early in the year).
It is better to wait until after the distribution and purchase the funds units at a lower price. Before distribution, you are effectively paying for that distribution in the unit purchase price.
14. Review investment portfolio.
Dividends and capital gains are subject to preferential tax treatment – outside your RRSP – and interest is accrued annually whether you receive it or not.
15. Make your RRSP contribution.
The earlier you make your contribution, the better. Tax-free compounding commences this way. If you have contribution left form previous years, remember to include them too.
16. Maximize your RRSP limit.
If you have some control of your income level – ensure that you have sufficient income to maximize your contribution limit.
17. Pay reasonable salaries to family members.
You can provide them with earned income for purposes of making RRSP contributions and CPP contributions, as well you achieve some income splitting.
18. Purchase capital assets.
If you run a business and are considering purchasing capital assets (such as a computer, furniture or equipment), consider making the purchase just before yearend. Then you will be able to claim depreciation on these assets (but only one-half regular depreciation amounts).
19. Pay down employer loan.
If your employer provided you with a low-interest loan during 1997, a taxable benefit will arise equal to the difference between interest calculated using CRA's prescribed interest rates and the amount of interest you pay on the loan. Be sure to pay any loan interest relating to this year by the end of January to reduce the amount of taxable benefit included on your T4 slip.
20. Review car expenses.
If your employer provides you with a car and pays for operating expenses, you will have to pay tax on a taxable benefit relating to the availability of the car (Standby charges). Click HERE for more. It is important to keep travel logs.
Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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