20 Tax Return Tips Canada

7/31/2019 20 Tax Return Tips Canada

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20Tax SavingTips by

Allan Madan

Tax time is grueling or any consumer. Through-

out the year you spend hours working, saving

and hoping you have ound every possible tax

deduction only to realize there was a lot more

you could have saved. On average, a person

misses several hundred dollars o deductions to

place on a tax return that could be a car pay-

ment, rent payment or even a ull rerigerator o

groceries. So this year, take on taxes like a pro-

essional and get to know the 20 tax saving tips

the government would rather you not know.
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T CTax Saving Tip 1: Know the Dierence between a Deduction and a Credit 3

Tax Saving Tip 2: Lend Money and Charge Interest 4

Tax Saving Tip 3: Generate Capital Gains in the Hands o Your Kids 5

Tax Saving Tip 4: Pay Household Expenses Through the Higher Income Spouse 6

Tax Saving Tip 5: Save Tax on Portolio Investments with a Family Trust 8

Tax Saving Tip 6: Create a Family Trust to Income Split Through a Corporation 9

Tax Saving Tip 8: Write-O Expenses against Commission Income 12

Tax Saving Tip 9: Deducting Travel Expenses 13

Tax Saving Tip 10: Expense Your Automobile Costs 14

Tax Saving Tip 11: Claim the Cost o Supplies 15

Tax Saving Tip 12: Write-O Home Oce Expenses 16

Tax Saving Tip 13: Dont Forget to Claim Union and Proessional Dues 17

Tax Saving Tip 14: Maximize Your Deductions or Home Oce Expenses 18

Tax Saving Tip 15: Maximize Deductions Related to Business Use o Your Automobile 21

Tax Saving Tip 16: Pay Salaries to Family Members 22

Tax Saving Tip 17: Incorporate Your Business 22

Tax Saving Tip 18: Use a Tax-Free Savings Account 23

Tax Saving Tip 19: Buy Flow-Through Shares 24

Tax Saving Tip 20: Borrow Money to Invest 26

Tax Saving Tip 21: Contribute to RRSP or Tax Deerral and Tax-Free Growth 27
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T S T 1: Kw h D

w D C

Basics Tips

You have certainly heard the terms deduction

and credit beore, but i you are asked to give a

denition you most likely cannot come up with

the dierences between the two. Though they are

both a positive or consumers when it comes to

taxes, there is a large dierence between what acredit and deduction will do or taxes.

A tax deduction is something you claim on your

tax return in order to lower your total taxable in-

come amount. When a tax return is prepared, you

calculate your total, taxable income. So or exam-

ple i your total taxable income is $100,000, and

you receive a tax deduction or $10,000, then yourtaxable income will be reduced to $90,000. This,

in turn, reduces your taxes payable or tax bill.

A tax credit on the other hand, lowers your tax

bill, not your taxable income. Thereore, i your

ederal and provincial tax bills are $300, but you

have a $200 tax credit, you subtract your tax

credit rom your tax bill due to arrive at a new tax

bill o $100.


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You may or may not have heard about income splitting beore. The term is just as it sounds splitting

o income. In the tax world, income splitting is nothing complicated, but it has to be done right or e-

ective tax planning. So what is income splitting? Income splitting is where an individual with a higher

tax bill gives or splits o money to another amily member in order to split or lower their income. For

such a relatively simple process, the savings are extraordinary.

There is a trick to perorming income splitting. You cannot just give a amily member with a

lower tax bill money and think that will x your tax problems you must create a loan and

with a loan comes interest. Heres how the mechanics work.

1. Create a loan agreement between yoursel and a amily member who has a lower income

than you.

2. Charge interest on the loan. The interest rate should be equal to the CRAs prescribed

rate o interest, which is currently only at 1%, a historical low.

3. The amily member pays out the interest on the loan directly to you by no later than Janu-

ary 30th o the ollowing year.

4. You deduct the interest paid on your personal tax return.

The lower income amily member can invest the loan proceeds into an income producing

investment, such as real estate, mutual unds, GICs, stocks, etc. And, the income earned will

be included in the taxable income o the lower income amily member!

Keep in mind, that the loan needs to seem as legitimate as possible. That means you need

to create a signed promissory note between you and the amily member. In that note there

should be details o the ollowing:

Date and amount o the loan

Interest charged to the loan

Calculation method used or the interest (i.e. annual, compounded daily or compounded

monthly)

Payment terms o the loan that include when interest will be paid (i.e. monthly payments,

due on demand, etc).

T S T 2: L M ChI

ncome Splitting


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T S T 3: G C G h H Y K

What is the point o doing this?? The point

is, any capital gains generated on your chil-

drens investments will be taxable to your

children, not you. Your child, no matter his

or her age, can earn up to $21,000 in capital

gains and the tax bill is minimal i any, espe-

cially i they have no other source o income.

It doesnt have to be just cash you lend to

your children or investments either. In act,

you can transer any current investments

in your name to your children directly or

the same eect. Just keep in mind, however,

when you are transerring assets, you are

considered selling them at their currentmarket value. So i those assets have any

appreciated value, you will most likely be

charged capital gains tax yoursel come tax

time.

Lets talk about interest, dividends, rents, and

royalties rom properties. Though you can

generally move these assets to your children

to avoid a tax bill at the end o the year, any

interest, dividends, rents, and royalties made

on that property is still taxable to you.

Income splitting can also be done by splitting it amongst your children, rather than another

amily member. One o the best ways to do this is by lending cash to your children to buy in-vestments. The age o your child will not matter

Income Splitting


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T S T 4: P Hh EThh h Hh I S

Income Splitting

One o the easiest ways to split income is by payingany household expenses through the spouse who

has the highest income. For example, your spouse

has a higher income and thus is in a higher mar-

ginal tax rate than yoursel. I all o the household

expenses are paid by your spouse, this rees up your

own income to use in investments. You can have

your spouse pay out your income tax as well as part

o the household expenses. Thus, your income is

ree to invest and you will incur the taxes on thoseinvestments based on your lower marginal tax rate

rather than paying a higher tax bill based on your

spouses marginal tax rate.


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Family trusts are an excellent tool to help manage amily nancial a-

airs especially in regards to properties and investments. Trusts are

not as dicult as they seem to set up either. In act, a quick visit to

your accountant and lawyer can start up a amily trust. There are legal

and accounting ees with the initial setup o a amily trust and eachyear amilies will need to le the T3 tax return or the amily trust, but

overall, the costs are more than deserving o it.

So how does a amily trust work?The rst thing to keep in mind is that a trust is not a legal entity like

a business. Instead o being a legal entity, it is a relationship between

three separate parties:

the settlor (the individual that settles property on the trust itsel),

the trustee (the individual given administrative power over the trustitsel) and

a beneciary (the individual that gets something out o the trust

itsel).

A trust can have multiple beneciaries, as most do, and they can have

more than one settlor and trustee i needed as well.

A trust is taxed like an individual is, by ling

taxable income at the end o the year using a T3

orm. Any income made on the trust is then ac-

tored into a tax bill. Trusts can avoid tax bills at

the end o the year by paying out the beneciary

or beneciaries any income that was earned in

the trust at the end o the year. The beneciar-

ies, however, will have to pay income tax on that

amount paid out to them.

Family Trusts


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T S T 5: S T PI wh F T

The entire point o a amily trust is to create an income split

among amily members. Typically parents or even grandpar-ents settle the amily trust by transerring cash assets (or

another orm o liquid asset within the trust) to the trustee as

a benet or the children listed as the beneciaries.

The cash can be invested by the trust in stocks, bonds, mutual

unds, real estate and other nancial assets. All, or a portion,

o the investment income made by the trust is paid to the ben-

eciaries o the trust. Instead o being included in one personstaxable income, the trusts income is split by multiple bene-

ciaries, which reduces the tax bill.

Trust

Real Estate

Trustees Beneficiaries

Family Trusts


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T S T 6: C F T I S Thh C

Family Trusts

Being a shareholder o a private company (such as a amily corporation) can increase

your overall income which come tax time poses an issue. You can, however, split yourcorporate shares income with members o your amily by using a amily trust.

Heres how the mechanics work:

Trust

Corporation

Trustees Beneficiaries

1. A non-amily member (e.g. close riend) loans a nominal amount (e.g. $20) to

the trust, to set it up.

2. Beneciaries are added to the trust. Typically, beneciaries are children,

grandchildren and spouses.

3. Trustees are appointed. Trustees can include you and your

spouse. A non-amily member should also be appointed as a

trustee, or a total o 3 trustees.

4. The trust purchases shares in your corporation. I your cor-

poration is newly ormed, the purchase price can be or a

small amount, e.g. $100. (Further steps are required or exist-

ing corporations that own assets, including goodwill).

5. The loan is repaid using your corporations cash.

Ater your amily trust owns the shares o the amily corpora-

tion, the corporation itsel can pay out dividends directly to the

trust. Now you are probably asking yoursel who will be responsible or the tax

bill on those dividends that were paid out. So who pays the tax? Thats right, the

beneciaries do. Luckily, i the beneciaries have no other sources o income,

each beneciary can receive up to $40,000 in dividends each year with little to

no tax to pay come tax time.


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Its time to think rom a tax point-o-view as you pack those boxes, wrap your

mothers china and old up your clothes or the big amily move. The tax-saving

tips with moving are clear as day you are allowed to deduct costs or moving

to start your own business, moving or a new job, or relocation to attend a new

school. Beore you start racking up those deductions, however, you need to keep

a ew things in mind:

Your new residence needs to be at least 40 kilometers closer to your new job,

school or business than your old place o residence.

You can deduct the costs o your move up to the income amount you have

earned at your new job (i that is the reason or your move).

Is your income too low at the new job to claim your moving costs? Not

to worry, you can carry those moving expenses over to the next year and

claim them. Some o the items you can deduct are:

Meals, lodging and other travel-related costs or the move

Moving ees, storage costs and truck rentals to relocate your homes

belongings

Cancellation costs or leases or rental agreements

Costs to sell your home (yes even rental commissions) Any legal charges applied to your new homes purchase

I you sold that old house, any tax payable on the new home rom

your property transer is deductible

T S T 7: P h F MC Mz T Bf

Moving CostsEvery amily has to move, but thinking about your move in a tax-

related way can make a dierence with how much tax is owed at

the end o the year.


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Moving Costs Any costs associated with maintaining your old or new

residence while it is vacant (including mortgage interest

or property taxes that reach a maximum o $5,000)

Legal ees associated with drivers license replacement,

utility connections, disconnections, automobile permits

and other legal documents associated with your new ad-

dress

Try planning your move so that it meets the 40

kilometer rule between your new job or new

school. For college students, make sure you

research any grants you can use or income at

your new residence so that you can have a tax-

able amount at the end o the year. Keep in mindthat ellowships, scholarships and bursaries

cannot be taxed as income and thereore i they

are your only source o income, you will not be

able to claim any moving expenses on them.


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I you are a commissioned employee that sells services or prod-

ucts you are in luck come tax time. You can claim the expenses

that help you get that commission against the income you

have earned o the commission. These expenses are deductedsimilar to that o a sel-employed individual. The catch, how-

ever, is you need to consider a ew o the ollowing:

Your must have a contract with your employer that states

you are liable or all expenses associated with your job

Your job must allow you to do work outside o the oce,

which in turn produces outside expenses

You can only claim expenses up to the commission limit

you have earned with your company, because you cannot

create a loss through your expenses

T S T 8: W-O E C I

Employment DeductionsAs an employee, you dont have many options when it comes to deductions

on your tax bill. However, there are ways to help bring down your income

that you have earned over the year, as minor as they may be. Take control

o your fnances and claim deductions your hard work entitled you to.


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Do a lot o travel in your line o work? I your company re-

quires you to pay or those travel expenses and you are not

reimbursed or given a tax-ree allowance, then you can de-

duct those travel expenses rom your tax bill at the end o the

year. Some costs you can deduct are:

Taxi, train, plane and bus ares

Parking ees

Hotel or motel stay ees

50% o meals and lodging (i you are a bus

driver, truck driver or fight attendant who isnot reimbursed

T S T 9: D T E

Employment Deductions


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You already pay the car payment and insurance, but did you know that costs touse your vehicle or employment can benet you come tax time? I your em-

ployer requires you to use your automobile or employment-related tasks and

you are not given a reimbursement, then you are allowed to deduct those costs

come tax time. What kind o automobile costs are relevant?

Mileage used by your personal vehicle or employment-related tasks

Parking ees and tolls your vehicle incurs while being used or business-re-

lated tasks

Depreciation o the vehicle or its use (or lease payments, i the vehicle isleased)

Oil changes, gasoline, repairs, registration ees and licensing (depending on

the overall use o the vehicle)

T S T 10: E Y AC


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I you had to purchase any supplies to use or your employment

or employment-related tasks that were not reimbursed by your

employer you are eligible or a deduction. In order to deduct thosesupply costs, however, your employer will need to complete Form

T2200, which will veriy that you paid or those employment-re-

lated supplies and you were not urnished a tax-ree allowance or

reimbursement. Supplies you can deduct are:

Cellular or long-distance charges (except any monthly service

charges or internet ees)

Oce supplies Supplies directly related to your work (i.e. construction employ-

ees that are required to supply their own tools)

T S T 11: C h C S



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Creating a home oce environment can become benecial at tax

time. There are situations where you can utilize a home oce oryour employer and you are entitled to deduct the costs o that oce

at tax time. Beore you attempt to write-o a home oce, you need

to make sure:

Your employer requires a home oce or you to work at

Your home oce is your principle place to work (which means

over hal o your work is perormed at home)

Your home oce is used on a regular basis to meet with clientsthat are related directly to your employment

With a home oce, there are some restrictions as to what you can

claim. There are limitations on how much rent, repairs, maintenance,

utilities and supplies you can claim within the home oce deduc-

tion, which is based on a percentage o how much square ootage is

used or your home oce in comparison to the homes total square

ootage.

T S T 12: W-O H OfE



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Did you pay union or other proessional dues or the year? I you hap-

pened to have to pay proessional or union dues in order to maintain

a membership with a particular organization or proessional services,

you can deduct the cost o those union and proessional dues rom

your income. Examples o union or proessional ees applicable are:

Fireghter or police ocers unions

Construction workers unions

Teachers, lawyers, accountants, engineers and other proessionalscan deduct proessional ees paid to their respective governing body

One exception to this deduction is or voluntary dues. I you have

joined a proessional organization or union voluntarily, you cannot

claim your dues. Employees that receive reimbursement or their pro-

essional dues or union ees cannot use the deduction either.

T S T 13: D F CU P D



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T S T 14: MzY D HOf EYou already have to pay to have a roo over your head, so why

not take advantage o that expense by making a portion othose living expenses deductible on this years taxes? Sel-

employed individuals are able to do just that. Beore you start

claiming your home oce, you need to

make sure your space alls into one o

two taxable categories:

1. Your home is where you conduct the

principal portion o your business

2. There is a specic location in your

home (such as a home oce) that is ex-

clusively used or your business

Looking or a legal tax shelter? There is a reason sel-employment is one o the best ways to

save on your annual taxes deductions. Tax laws allow sel-employed individuals to claim

deductions or just about any costs associated with their sel-employment work, just as long

as they are directly associated with the income o the business. Ready to stake your claim on

some sel-employment deductions?

Business Deductions


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Business DeductionsI your sel-employment meets one o those two criteria (or both), you

are allowed to start deducting your home oce expenses. The biggest

mistake sel-employed individuals make, however, is skipping over valu-

able deductions. So what can you deduct?

Rent

Interest on a mortgage loan

Property tax

Utilities to run the space (i.e. electricity, gas, water)

Home owners or renters insurance

Repairs and maintenance or the space to unction

Landscaping

Snow plowing

Additional expenses such as urther insurance Telephone (Note: there are special exceptions to this explained be-

low)

Beore you start deducting your entire rental payment or ull util-

ity bill, you need to keep one thing in mind. You only deduct a

percentage o those expenses based on the total square ootage

o your home oce out o the total square ootage o your home.

For example, your home is 1,000 square eet and your home ocetakes up 100 square eet o that home that means your home

oce uses 10 percent o the total space in your home. So in turn,

you can deduct 10 percent o your expenses listed above rom your

taxable income.

I you live in Quebec, your deductions will be reduced by 50 per-

cent due to changes in the provinces 1996 budget.


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Business DeductionsNo matter where you live, it is important to maximize your deductions

as much as possible. How do you maximize your deductions?

Increasing the amount o square ootage your home oce takes up

in your home. For example, include space in another room or stor-

age or include the bathroom as part o the square ootage or your

home business.

Exclude square ootage that is non-usable. For example, i you have

an unnished basement, you can exclude that square ootage rom

the total square ootage o your home.

You can write o 100 percent o your telephone line, however the tel-

ephone line must be solely dedicated to your home business and cannot

be used or personal phone calls o any kind. You must prove that youhave a separate line or the business in order to take on this deduction.

You can still deduct telephone use, however, even i you do not have a

dedicated business line. In this case, your business time usage versus

your personal use will create the deduction amount.


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Sel-employed individuals have it made when it comes to de-

ductions and the automobile deductions are no dierent. Thesame rules apply when it comes to automobile expenses or

employees and the sel-employed, which mean you can write

o:

Mileage used by your personal vehi-

cle or employment-related tasks

Parking ees and tolls your vehicle

incurs while being used or busi-

ness-related tasks Depreciation o the vehicle or its

use (or leases payments, i you lease

your vehicle)

Oil changes, gasoline, repairs, regis-

tration ees and licensing (depend-

ing on the overall use o the vehicle)

Automobile club costs

Car washes Insurance

Auto loan interest

Want to save even more? Instead o trading in that old car,

keep it! Thats right, by keeping your old car, you are more

likely to have repair costs, which means more to deduct rom

your annual taxes than a new car with minimal (i any) repairs.

T S T 15: Mz DR B U Y A

Business Deductions


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Business Deductions

When it comes to saving some money on taxes, your business

can help. Since incorporated companies only pay 15.5% o com-

bined Federal and Ontario rate taxes on their rst $500,000 in

prots, it is certainly a money saving alternative to the typical46.4% the average consumer would pay on the same amount o

prots. So what does that mean or you? That means i you in-

corporate your business, you are looking at a much lower rate o

taxes 31% to be exact.Is your business already incorporated? I so, you can save even

more by deerring your taxes to leave as much money as you

can in your business. This is because prots rom your business

typically go to you and when they do, you will pay your own

personal income tax on those prots. For example, your income

has placed you in the highest tax bracket o 46.4%, but by leav-

ing prots within your incorporated business you reduce that

amount by 31% and leave those prots inside the business rath-

er than paying it directly to you.

T S T 17: IY B

Sel-employed individuals can take advantage o income split-

ting just like a regular employed individual. Essentially, sel-employed individuals are taking advantage o the act that they

can claim deductions or salaries or wages paid to employees,

but rather than employees, they are paid to amily members.

The compensation, however, must be reasonable or the services

rendered.

T S T 16: P S F M


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As o 2008, investors have a new option: a tax-ree savings account. Known as a TFSA, a tax-

ree savings account allows investors to earn their income on a tax-ree basis within their

savings account. So how does it work?

You cannot claim a deduction or any money you contribute to your TFSA, however all o

the earnings inside your savings account will become tax-ree and any money you withdraw

rom that account is also tax-ree. To be eligible or a TFSA you must:

Be a Canadian resident

Be at least 18 years o age

Open a TFSA account at any qualiying bank, credit union, trust or other nancial institu-

tion

You must provide your social insurance number at the time you open the account

Your grandparents, parents and even co-workers are

talking about their investments and or good reason

there are numerous tax benets to investments as long

as you operate them right. Sure

investments are seen as additional

income, but by understanding the

tax laws, you can invest without

taking a hit at the end o the year.

T S T 18: U T-FS A

Investing


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Want a more attractive investment thatwont come back and hurt you come tax

time? Flow-shares are an appealing alterna-

tive that help investors save money and en-

joy direct tax savings. Though they are more

attractive, fow-through shares are much

higher-risk than your average investment

and are issued by Canadian companies that

need to raise capital or development. The

shares themselves are specically designedto give investors tax deductions that will

come equal to or close to the amount origi-

nally invested.

Instead o the company using these deduc-

tions, they renounce these deductions and

fow them through the consumer whohas invested in their company so that they

can claim the deductions instead. Typically

these are Canadian exploration expenses,

also known as CEE, which you can deduct

100% o o your taxable income. The other

deduction, Canadian development expenses,

are 30% deductible, but on a declining basis.

Beore the company incurs any costs, they

can renounce the deductions up to one year.For example, a company that is issuing fow-

shares in the year 2011 can renounce their

eligible expenses in the year o 2011 and not

pay or those expenses until the year 2012.

You can open more than one TFSA account, however the total

contribution amount between the multiple accounts cannot be

more than your contribution room allows. What is your contri-

bution room limited by?

For each year starting in 2009 you can claim up to $5,000,

which will be indexed to infation and rounded to the nearest

$500 annually.

Withdrawals made the year beore are eligible to be re-invest-

ed into the TFSA on top o the new years contribution room.

Any unused contribution room rom the prior year can be

added to the current year.

T S T 19: B Fw-Thh Sh

nvesting


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Some acts to keep in mind about fow-through shares:

Flow-shares provide tax deductions to the investor that

equals up to the same amount o the investment

Deductions are not used in the same year, but about 90%

are deductible the rst year, while the balance is deducted

in the second or third year

Flow-shares will be reduced by any deductions the inves-

tor is able to claim

Flow-shares do raise the issue o capital gains toward the

investor, however investors that have capital losses to use

can invest in fow-shares or capital gain down the road

So is there really a return in fow-shares? Investors thatclaim the ull deductions on their investments one year ater

selling their shares can earn back close to what they origi-

nally paid. Even when shares drop, most investors still break

even due to the tax savings o fow-shares as long as the

investor has a marginal tax rate o 46 percent.

Original Purchase Price $10,000

Deductions Claimed $4,600

Amount Earned on Sale o

Shares

$10,000

Tax or Capital Gain Sale $2,300

Investment Dollar Return $2,300

Percentage o Return (ater tax) 23%

Percentage o Return or Flow-Shares

Investing


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nvestingT S T 20: BwM IBorrowing, also reerred to leveraging in the investment world,

is one o the more eective ways to invest. By leveraging an

investment, essentially, you are borrowing in order to invest in

it. Though borrowing typically spells trouble, there are numer-

ous advantages or consumers when they borrow in order to

invest. How so?

By leveraging you are orced to invest, because the money

borrowed is or investment-only and the borrower pays

back the leverage throughout the lie o the investment

By using anothers resources, a borrower can build their ownwealth. A borrower can jump-start their investment porto-

lio, even i they do not have the capital themselves

Eective returns can be boosted by leveraging

Financial goals o the borrower can be reached aster

through leveraging

Leveraging creates a tax deduction when it comes to inter-

est charges on the leveraged amount


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An RRSP, also known as a Registered Retirement Savings Plan is registered with the CRA orCanadian Revenue Agency. Rather than skip saving or retirement, the RRSP was designed to

help encourage retirement savings plans. Using an RRSP has two benets when it comes to

taxes:

T S T 21: C RRSP TD T-F Gwh

Investing

T D: RRSP contributions are

tax deductible, which reduces your tax

bill. The maximum amount that you can

contribute to your RRSP in year, known

as your RRSP Contribution Limit, can beound on your Notice o Assessment. The

maximum RRSP Contribution Limit or

the 2011 year is $22,450. The contribution

limit is indexed annually or infation.

T-F Gwh: Unlike traditional

investments, income earned within an

RRSP account stays tax-ree as long as

it stays within the account regardless

o how much is earned. For example, anindividual that put away $300 per month

or a total o 30 years with a 7% growth

rate would earn $352,953 total at the end

o the 30 year period. I the consumer had

invested that money outside the account,

she would have aced a tax rate o 46%

on that same income generation, and

would have ar less money at the end othe 30 year period - $198,629. That means

money growing within your RRSP account

stays tax-ree unlike traditional invest-

ments where you have to pay annual tax

on any gains earned.


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nvesting

One important thing to remember about RRSPs is

that the earlier you start, the more you will earn. Even

waiting ve years can make a signicant dierence on

how much is earned as the tax-ree account grows.
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