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Compiling a top 10 list of tax tips is a difficult task.  What may be crucially important for some taxpayers will be completely irrelevant for others.  The items I have focused on in this list do not necessarily represent the biggest overall tax savings, but rather some of the more common examples of filing errors and/or missed tax planning opportunities that I have seen in my accounting practice.

10. Make yourself aware of changes in tax rules that may relate to your situation

I have seen many taxpayers prepare their returns year after year, without looking into any changes that may affect them.  Examples from recent years include the addition of the Children’s Arts Tax Credit, the elimination of the $10,000 ceiling on claiming medical expenses for other dependants, and the introduction of the family caregiver tax credit.  New for 2013 is the increase in the annual TFSA contribution limit from $5,000 to $5,500, the elimination of deductions for safety deposit boxes and an additional credit of 25% for first time charitable donation claims.  If any of these sound like they might apply to you, make sure you find out the details!

9. Change in marital status

There are many tax based credits and benefits that are dependent on the combined income of you and your spouse.  These include the HST credit, the Trillium Benefit and the Child Tax Benefit.  Although Revenue Canada is probably not the first thing on your mind if you are getting married, separated or divorced, it is nonetheless important that you advise them as soon as possible.  Depending on your situation, you may be either missing out on some well needed funds, or setting yourself up for a nasty surprise when they request that you repay benefits received.

8. Term life insurance

In most circumstances, premiums paid for term life insurance are not tax deductible.  The one notable exception is if you are taking out a business loan, and the financial institution you are dealing with stipulates that life insurance is required as a condition for receiving the proceeds.  I have seen several cases where taxpayers have told me that they needed to provide evidence of adequate life insurance to receive a loan, however no mention of this ended up in the loan document.  If you are in this situation, make sure that the insurance requirement is a written condition of the loan.  Banks will generally offer you “loan insurance” when you take out any sort of loan.  Unless you are otherwise uninsurable, in most cases it will be advisable to decline this insurance, since the premiums are usually much more expensive than what you would pay by seeking out your own independent insurance agent.

7. Consider incorporating your business

If you are currently earning self-employment income from an unincorporated business, you should consider whether incorporation may be beneficial for you.  There is a much wider range of opportunities for tax planning with income earned through a corporation than there is for self-employment income, and while there are additional costs involved in operating an incorporated business, these are often more than offset by the potential tax savings.

6. Pay yourself a salary – even if your corporation is not yet profitable

For those of you who are already incorporated, one of the most common mistakes I see in start-ups is owners that do not pay themselves a salary, especially when they do not have any significant other source of income.  Smaller salaries can be paid attracting little to no tax, and the additional losses created in the business can be used to offset taxes payable in the future when the business becomes profitable.  If the business cannot afford the cash-flow to pay the salary, then salaries payable can be simply added to shareholder loans, which can be paid out tax free in the future.  The regular government payroll reporting must be done however.

5. Medical Expenses for other dependants

While most taxpayers are aware that they can consolidate the medical expenses for their spouses and minor children on one tax return in order to maximize the benefits, many are less clear on the rules surrounding medical expenses for other dependents (such as an elderly parent).  You can claim medical expenses for qualified other dependants as long as two criteria are met – they must be financially dependent on you, and you must actually pay for the expense.  Many taxpayers who are supporting elderly parents make the mistake of simply providing them with additional funds and then having the expenses paid out of the parent’s account.  In order for the expense to qualify however, it must be paid directly by the taxpayer.  Since expenses such as fees paid to a nursing home can qualify for this credit, there are quite often significant tax dollars at stake here.

4. Timing of expenses

The timing of when you incur expenses    can have a significant impact on your taxes payable.  For example, if you operate an unincorporated business and were planning on a large stationary order in January (because that’s when you needed it), consider making that purchase in December instead.  Another area where timing can have an impact is on medical expenses.  Since medical expense claims for tax are reduced by the lesser of 3% of your net income and $2,100 , it makes sense to consolidate your expenses into one year where possible.  Although the timing of many medical expense claims is not discretionary, some can be.  For example, if you just had a root canal done, maybe it’s time you looked at getting that new pair of glasses!

3. RRSP vs. TFSA

If you ask the typical Canadian taxpayer what they are doing to save on taxes, probably the most common answer will be contribution to an RRSP (and to a somewhat lesser extent, a TFSA).  It is important however to analyze how to best maximize savings using these vehicles.  One common pitfall I have seen is where RRSP contributions are being made in years when tax rates are very low or even when no income tax is payable at all.  As Canadians, we have become so used to RRSP’s being our primary retirement strategy, that any contribution is seen a good thing to help us in our retirement years.  In most cases when I have talked to taxpayers that have made contributions resulting in little or no tax deduction, they were already aware that this would be the case but they still wanted to make that contribution towards their retirement.  What most of them failed to consider is that by putting these funds into an RRSP, they will become 100% taxable when they are taken out even though little or no tax deduction was received.  In this type of scenario, they would be far better off contributing to a TFSA which has no tax deduction, but also does not attract any tax when funds are withdrawn.

2. Disability tax credit

The disability tax credit is definitely one of the larger “missed” tax credits that I commonly see.  Sometimes this is because the taxpayer (or their caregiver) is unaware of the criteria.  Other times, it is because individuals don’t want to be labelled as disabled, even when it brings a large tax break.  I have had several cases in my practice where significant tax refunds have been received by making retroactive claims for this credit.  Common areas missed for claims are for cases of dementia, or the inability to walk unassisted.  In cases where the taxpayer is unable to use the credit, it is transferrable to a spouse or other supporting person, so it is indeed a valuable credit.  If you think that you or someone you care for may be eligible for this credit, you should definitely look further into the criteria for eligibility.

1. Pension income splitting

While I have not seen many cases of missed pension income splitting, it still rates the number one spot due to the potential for large tax savings foregone.  For many retired taxpayers, this has been by far the most generous change in our tax laws of the past decade.  In extreme cases where one spouse has retired with investment savings and a good pension, and the other spouse stayed at home throughout their married life, I have seen annual tax savings from this measure exceed $10,000.  Multiply that by the number of retirement years, and it can end up being a very significant tax savings indeed!