Question: My husband and I file our own taxes each year. I’m not a tax expert, but I try to educate myself so I can lower my taxes wherever possible. Can you give me any basic advice or tips so I can make sure I’m being smart about taxes and taking advantage of any tax saving strategies available to me?
Answer: The deadline for filing 2017 taxes is still several months away – April 30th, 2018 for most Canadians, and June 15th, 2018 for individuals who have self-employment income (although the due date for any balance owing is still April 30th, 2018).
Of course, while the deadline for filing your taxes is still months away, the 2017 year-end is only weeks away, and most strategies discussed in this post would have to be implemented before December 31st in order to effective for the 2017 tax year.
With that in mind, let’s take a look at some potential tax saving tips and strategies.
Tax Saving Tips and Strategies
If you’re planning to contribute to an RESP, you should consider making the contribution before December 31st in order to maximize the Canada Education Savings Grant (CESG) for 2017. The first $2,500 of annual RESP contribution is eligible for a 20 percent CESG matching contribution, to a maximum of $500 CESG per child, per year. However, although carry-forward is available for unused years, it is limited to one year at a time. That is, in any given year, the maximum possible CESG is $1,000 (current year plus one “catch-up” year). It is therefore wise to contribute each year to ensure you receive the maximum CESG matching contribution.
The deadline for RRSP contributions for the 2017 tax year is March 1, 2018. But why wait? Waiting until the last minute to make an RRSP contribution means you also miss out on a full year of tax-free growth. If you’re not doing so already, you should consider setting up a regular ongoing contribution to your RRSP (known as a dollar-cost averaging strategy) so you’re not scrambling to meet the deadline to make a last minute contribution. Additionally, if you’re converting your RRSP to a RRIF this year, you may want to make one final tax-deductible contribution before year-end.
Check the status of any realized capital gains and losses in your non-registered accounts, and make portfolio adjustments you deem appropriate. Of course, the decision for buying or selling investments should never be driven solely by taxes, so if it does not make sense to sell an investment, then doing so simply to trigger a capital loss is likely not the best strategy. For a more comprehensive discussion on tax-loss selling, please see our previous blog post here.
Many equity funds, both mutual funds and exchange traded funds (ETFs) distribute realized gains such capital gains, interest or dividends, only once a year – usually in December. Of course, this isn’t an issue inside tax-sheltered accounts such as a TFSA or an RRSP, but it most certainly is an issue in a non‑registered account. If you buy a fund just before the fund makes its distribution, you will face taxes on that distribution, yet you have not participated in the associated gains. In short, you’ll be taxed on gains you never had in the first place. To avoid this, you could consider deferring purchase of such funds until January of 2018. But again, the decision for buying or selling investments should never be driven solely by taxes. You may incur a significant opportunity cost for delaying an investment purchase my missing out on investment gains that could have been otherwise enjoyed.
You should consider paying deductible medical expenses before December 31st so that you may claim them on your 2017 tax return. Note that, you can claim the total medical expenses for both you and your spouse (or common-law partner) on one tax return. Furthermore, it’s generally advisable for the lower income spouse to claim those expenses. Why? Because the lower of $2,268 (2017) and 3% of net income is deducted from your medical expenses to determine the tax credit amount.
If you plan to make any charitable donations before year-end, consider making your contribution with shares that have appreciated in value. Why? Because there is a tax incentive for donating securities (including stocks, bonds and mutual funds) to charitable organizations. Since 2006, capital gains on publicly traded securities are not taxable when those securities are donated to a registered charity. The charity will receive the full value of the donation, and you will owe nothing in taxes, regardless of the size of the capital gain. Note that capital losses are denied on in-kind contributions, so donating shares that have decreased in value is generally not advisable, so sell those shares instead and donate the cash. The annual limit on charitable donations is currently 75% of your net income (extended to 100 percent in the year of death and year prior).
Small business owners
If you’re a small business owner, or if you are self-employed, you may want to consider incurring business expenses before year-end (if your business year-end is December 31st). This will allow your qualifying expenses to be deducted in the current year. Also, if you own a corporation, you may consider declaring a bonus prior to year-end in order to reduce income in your corporation below the small business deduction (SBD) threshold. Note that the current federal limit is $500,000, and provinces also have a small business rate which varies from province to province.
Not to be confused with asset allocation, asset location refers to the accounts where you hold your equity and fixed income investments. In general, and to the extent possible, it is generally advisable to hold income-generating investments (bonds, GICs, etc) within registered plans, and equity investments (stocks, equity mutual funds and ETFs, etc) generating in non-registered accounts. Why? Inside a registered account (such as RRSP or RRIF), all investment returns are effectively the same, and the preferential tax treatment enjoyed by dividends and capital gains is lost. Conversely, if you have registered and non-registered accounts, holding your equity-based investments in the non-registered account will allow for better tax treatment.
Common Non-Refundable Federal Tax Credits Available in 2017
- Basic personal amount: $11,635 – Every individual who is a resident of Canada can claim this amount
- Age amount: $7,225 – Available to those who will be 65 or older on December 31, 2017, with net income less than $36,430
- Pension income amount: $2,000 – Available to those receiving regular pension payments from a pension plan or fund (excluding CPP, QPP, OAS, or GIS) may claim the lesser of $2,000 or annual pension received
- Spouse or common-law partner amount: $11,635 – Available to those who support a spouse or common-law partner with no income. Income between $1 and $11,635 results in a partial claim.
- Tuition amount (full-time and part-time students) – Individuals may claim the total amount of tuition fees paid at a qualifying institution
- Disability amount: $8,113 – Available only to those who qualify for the Disability Tax Credit
Please note that some credits have additional caveats and income thresholds. Furthermore, depending on your own personal circumstances, other credits may also be available. For more information, please see the 2017 Personal Tax Credits Return from the CRA.