Looking back on my past posts, I realized it has been five years since I put out my last “Top 10 Tax Tips”. Some advice has not changed in that time (and is repeated below) while other tax tips have come and gone. The trend over the past few years has been a reduction in the diversity of tax credits available, and replacing it with direct spending. For example, the Children’s Art Credit, Sport’s Credit, Transit Credit, Education and Textbook amounts have all been eliminated, and been replaced by more direct payments in these areas, such as the enhanced Canada Child Benefit. The good news is that you no longer have to worry about collecting all of these receipts at tax time!

10. Tuition tax credit

While as mentioned above, the education and textbook credits have been eliminated, the tuition credit is still in place. Tuition must first be claimed by the student to the extent they have taxes payable, but most students have limited income so the credit can be transferred to their parents. There is no age limitation on this; if your 30 year-old child is still going to school you can claim the credit as long as they sign it over to you. Several years ago, most educational institutions stopped mailing tax receipts – the student musr download the receipt from their student portal. Please ensure that if you have kids in post-secondary school that you ask them to do this. I have seen far too many people miss out on this credit simply because they do not get the receipt in the mail.

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, Trillium Benefit and the Canada Child 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. File your tax return – even if you have no taxes to pay

There are a number of reasons that it is important to file your tax return. One reason is that while all of the credits mentioned in point 9 above are only indirectly related to your income tax return – you will not receive them if you don’t file. If you are in a relatively low tax bracket, some of these credits can be significant. Another reason is that even if your earned income is quite low and you don’t have taxes to pay, declaring this income will still add to your RRSP contribution room that you may need in later years when your income is higher.

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. Canada Caregiver Credit

Last year, the system of credits available for taxpayers who support dependants with a physical or mental impairment was completely overhauled, replacing the caregiver tax credit, the infirm dependant tax credit, and the family caregiver tax credit with the new Canada Caregiver Credit. This has greatly simplified claiming these amounts, since the manner in which the old credits interacted with each other was confusing at best.  There are also some major changes in eligibility criteria, such as it is not longer necessary that the dependant live with you in order to claim the credit.  If you are providing support for an infirm parent or other dependant with disabilities, you should verify whether you are eligible to claim this credit.

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 $2,300, 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/or 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 the taxpayer’s marginal tax rate is very low or even when no income tax is payable at all.  As Canadians, we have become used to RRSP’s being our primary retirement strategy so 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 savings, 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!