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E&Y's Top 10 Tax Filing Tips
E&Y's Top 10 Tax Filing Tips
By Gena Katz, CA, CFP
Another year has flown by and believe it or not, it�s time to think about filing tax returns again. To help you through what many Canadians consider to be a real nail-biting process, here are 10 practical tax-filing suggestions for your consideration.
Some of the suggestions will save you time, some will save your nerves and�best of all�many will even save you money. So instead of approaching this year�s tax return preparation with fear and trepidation, take control, and be methodical. A carefully prepared tax return can mean great benefits for you.
1. Charitable donations
There are a number of filing opportunities relating to donations. The federal tax credit for donations is available in two stages. A low-rate credit is available on the first $200 of donations made in the year, and a high-rate credit is available on the remainder. Spouses and common-law partners can claim donations in respect of one another�it therefore makes sense for only one spouse to claim all of the family donations. A tax savings results because the low-rate credit is only used once.
Another way to benefit from the high-rate credit is to accumulate donations made over a few years and claim them all in one year. The donation credit is available for donations made within the five preceding years.
Remember that if you donated stocks, bonds or mutual funds, only 25% of the resulting capital gain must be included in your income.
2. Medical expenses
The claim for medical expenses is limited by an income threshold. In other words, the lower your net income, the more you can claim in eligible medical expenses. Because one spouse or common-law partner can claim medical expenses on behalf of the entire family, claim all expenses in the lower-income spouse�s return. But remember, this is a non-refundable credit and, therefore, the spouse who is making the claim should have sufficient income to absorb the entire credit. And if you cared for an elderly parent or grandparent or an infirm dependant in your home, you may be entitled to claim a caregiver tax credit.
3. Business owners
As a self-employed individual, there are a number of business-related expenses that you can claim to reduce the tax you pay. Ensure that you have taken advantage of all available deductions, including automobile expenses, parking, business association fees, home office expenses (if you qualify), entertainment, convention expenses (a maximum of two per year), cell phone, depreciation on your computer and salaries paid to assistants, including family members. Remember that in most cases, you can deduct private health-care premiums as a business expense instead of a medical expense and one-half of CPP paid in respect of self-employed earnings is deductible instead of creditable.
A word of caution: if you claim home-office expenses, you�re likely better off not to claim the depreciation on the home office portion of your home. Although this will give you a deduction in the current year, you will lose some the capital gains protection available from the principal residence exemption.
4. Old receipts you find may not be garbage
In gathering together your information, you may stumble across older receipts that still have value in your 2005 return. Specifically, charitable donations can be carried forward and used in any of the five years after the year the gift is made. And with respect to medical expense receipts, you can claim medical expenses for any 12-month period that ends in that year if they have not been claimed previously. In addition, under the fairness provisions, CRA has the discretion to make adjustment to previously filed returns (10 years back), in relation to certain errors or omissions, on request from a taxpayer.
5. Moving during the year
If you moved during 2005 to start a new job, a new business or go to university or college, you may be able to claim expenses relating to the move. In addition to the actual cost of moving your personal effects, you can claim travel costs, including meals and lodging while en route. Lease cancellation costs, as well as various expenses associated with the sale of your former residence, are also deductible, including up to $5,000 in costs associated with maintaining a former residence that was not sold before the move. The expenses are only deductible to the extent of income from the new work or business location and if this income is insufficient to claim all of the moving expenses in the year of the move, the remaining expenses may be carried forward and deducted in the next year.
6. Filing tax returns for children
It is often not necessary for your children to file a tax return, even though they may have earned income in the year. Nonetheless, in many cases it makes sense to file a tax return. If your children had part-time jobs during the year or have been paid for various small jobs, such as baby-sitting, snow removal or lawn care, by filing a tax return they report earned income and thus establish contribution room for purposes of making RRSP contributions. The contributions can be made in any future year.
Another advantage in filing a return for teenagers is the availability of refundable tax credits. Many of the provinces offer such credits to low- or no-income individuals. When there is no provincial tax to be reduced, the credit is paid out to the taxpayer.
7. Allowable business investment losses
If you�ve invested money in a small business corporation, perhaps to help a friend or family member get started, and all you have to show for your investment is shares or a note of a worthless corporation, you may be able to claim a loss on the invested funds. This loss, referred to as a �business investment loss,� is like a capital loss in that only one-half is deductible; however, unlike a capital loss, it can be claimed against any income in the year, not just capital gains.
8. Carryback your capital losses
Capital losses can only be applied against capital gains�and if you have a net capital loss for the year, it can be carried back three years and/or carried forward indefinitely, to be applied against capital gains realized in those years. If you realized a net capital loss in 2005 and have realized net gains in any of 2002-2004, file a form T1A to carry the loss back to those years and recover the related tax.
9. Use tax return preparation software
There are a number of inexpensive income-tax software packages available that you can use to prepare your tax return. These programs often provide step-by-step instruction and helpful tax-filing hints based on the information you input.
10. Consider electronic filing if you are expecting a refund
Electronically filed returns are generally quicker and easier to prepare and are less prone to mechanical errors. The processing time of electronically filed returns is substantially shorter than that associated with paper returns. If you are getting a tax refund, you can expect it within two weeks if you file electronically (as opposed to six to eight weeks for a paper return). Electronic filing options include Netfile, Efile and Telefile. In order to Netfile, you will have to use approved tax-return software. Alternatively, you can have your return filed electronically by using an approved Efile agent who will charge a fee for this service. Telefile is available for simple returns.
And here�s a bonus suggestion: Most people who report more than just employment income on their annual tax return can benefit from having the return prepared or at least reviewed by a professional advisor. Tax-return information can alert an advisor to a number of potential tax-savings opportunities that can provide benefits for many years to come.
http://www.ey.com/GLOBAL/content.ns...Tax-Filing_Tips
Disclaimer: If unsure, it is always adviseable to consult an accountant or trained tax filing professional.
CRA fines and fees are extordinary - so ask a professional if anything is unclear.
Great post, RJ!
E&Y's "Managing Your Personal Taxes: 2005-2006"
http://www.ey.com/global/download.n.../MYPT 05_06.pdf
Download this document! This is one of the best easy to understand personal tax guides I have ever seen.
The biggest expense people have is not a mortgage, but the taxes they pay.
Just a financial planning is important to plan for your financial future, tax planning is important to help avoid unnecessary taxation.
11. Tom Vu
12. RRSP contributions.......i just made myself a small fortune for free, esp since im buying a house later this year and getting the money outa my rrsp tax free w00t! (i am aware i eventually have to pay it back into my rrsp) but i was going to do that anyways).
^^^ very smart...I'll be using the 20k home buyer's plan option myself in about a year 
if you have the opportunity to have payroll deductions, I believe hey can be pre-tax deductions...i.e. your employer deducts it from your income before they calculate your income tax payable...so you get the money now, rather than waiting for a refund...plus those contributions earn interest right away instead of making a lump sum RRSP contribution at the end of the tax year.
don't fool yourself into thinking you "scored" if you get a big refund...while it is a convenient way to save money, you've essentially just given the gov't an interest free loan over the course of the year...you could have better planned those deductions and saved the money right away and either invested it or paid down debt 
point number 6 is only valid if you moved closer to your work/study by a significant distance... most people don't benefit from it.
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| Originally posted by MarkT saved the money right away and either invested it or paid down debt |
tax evasion ftw!
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| Originally posted by MarkT ^^^ very smart...I'll be using the 20k home buyer's plan option myself in about a year if you have the opportunity to have payroll deductions, I believe hey can be pre-tax deductions...i.e. your employer deducts it from your income before they calculate your income tax payable...so you get the money now, rather than waiting for a refund...plus those contributions earn interest right away instead of making a lump sum RRSP contribution at the end of the tax year. don't fool yourself into thinking you "scored" if you get a big refund...while it is a convenient way to save money, you've essentially just given the gov't an interest free loan over the course of the year...you could have better planned those deductions and saved the money right away and either invested it or paid down debt |
$3500 return for me.. hehe I love LSIF. Labour Sponsored Investment Funds.. Free Money! Too bad, I roll it over back into RRSP's, But i''ll be retired by 50... muhaah
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| Originally posted by Platipus $3500 return for me.. hehe I love LSIF. Labour Sponsored Investment Funds.. Free Money! Too bad, I roll it over back into RRSP's, But i''ll be retired by 50... muhaah |
I've been filing my taxes electronically for the past few years with Ufile.ca and Netfile.. so quick and easy!
Can't wait to get my refund 
I mail my accountant a pile of receipts, sheets and sh-t, pay him $75, and he does everything for me (well more to that, we still call each other).
No stress..... and that's worth $75 in therapy alone.
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| Originally posted by Pettiscool yea but i dont have any debt....and i just thought of doing this in the last week, so i woulda missed out on some real money, either way, i got some "free" money anyways, how come u never got back to me about mortgage talk? |
Personally, I'm 100% against using one's RSP as a loan for a down payment on a house.
By using an RSP as a down-payment loan you lose the time value of money - which is the major contributing factor to the end balance.
Do the math on a 25 year vs. 35 year compounding principle and you'll find that the additional 10 years provides nearly 3X great balance (it doubles in 7 years @ 10%, so just under triples in 10 years @ 10%).
With borrowing cheap right now and the ability to do do ultra-high ratio (sometimes 100%) mortgages - the depletion of the RSP costs more than the mortgage interest reduction (by having a down payment).
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| Originally posted by rabbitjoker By using an RSP as a down-payment loan you loose the time value of money - which is the major contributing factor to the end balance. |
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| Originally posted by Swamper Nothing worse than loose $ |
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| Originally posted by rabbitjoker Personally, I'm 100% against using one's RSP as a loan for a down payment on a house. By using an RSP as a down-payment loan you lose the time value of money - which is the major contributing factor to the end balance. Do the math on a 25 year vs. 35 year compounding principle and you'll find that the additional 10 years provides nearly 3X great balance (it doubles in 7 years @ 10%, so just under triples in 10 years @ 10%). With borrowing cheap right now and the ability to do do ultra-high ratio (sometimes 100%) mortgages - the depletion of the RSP costs more than the mortgage interest reduction (by having a down payment). |
| quote: |
| Originally posted by rabbitjoker Personally, I'm 100% against using one's RSP as a loan for a down payment on a house. By using an RSP as a down-payment loan you lose the time value of money - which is the major contributing factor to the end balance. Do the math on a 25 year vs. 35 year compounding principle and you'll find that the additional 10 years provides nearly 3X great balance (it doubles in 7 years @ 10%, so just under triples in 10 years @ 10%). With borrowing cheap right now and the ability to do do ultra-high ratio (sometimes 100%) mortgages - the depletion of the RSP costs more than the mortgage interest reduction (by having a down payment). |
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| Originally posted by MarkT hmmm...I see what you're saying with losing the time value of your RRSP money, but that assuming 10% returns EVERY YEAR on your RRSP, which is ambitious, no? |
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| Originally posted by MarkT There's a "time value" (kind of in a reverse sense) with mortgages too, right? it's being amortized over a long period of time. That extra 20k you put down is saving you a LOT more than 20k by the time it's paid off, especially when rates are not this low. |
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| Originally posted by rabbitjoker I've just run the numbers - here is what I get: Assume 25 year mortgage, 7% average interest over term of mortgage. A $200,000 mortgage nets out to $220,000 in interest payments over the term of the mortgage. Borrowing $20k from an RSP to get $180,000 mortgage nets out to $198,000 in interest payments - a savings of $22,000 in interest payments. $20,000 invested over a 25 year time horrizon (period of the mortgage), using TSX average annual return over the last 50 years (10%) nets out to $216,694.12. Assume you take 10 years to pay back the RSP loan ($166/month in payments) - that leaves 15 years of compounding on the RSP - total balance at the end of the same 25 year period: $83,544.96 ($133k less than if you just left the money in the RSP). Assume you take the full 15 years to pay back the RSP loan ($110/month in payments) - that leaves 10 years of compounding on the RSP - total bance at the end of the same 25 year priod: $51,874.85 ($165k less than if you just left the money in the RSP). Even with a 5 year repayment (20 years compounding) on the RSP loan ($333/month in payments) the total RSP value is $134,550.00 - $82,000 LESS than if you just left the money in the RSP. Even if one was to add in the CHMC premium - the $22,000 savings in interest on the mortgage is not worth the loss in growth on the RSP. 5 year loan repayment - $82,000 growth forgone 10 year loan repayment - $133k growth forgone 15 year loan repayment - $165k growth forgone |
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| Originally posted by JRinger Thirdly, you are assuming you return 10% on your RRSP investments. Nobody uses that for financial planning. NOBODY. It is irresponsible and potentially a major liability issue. |
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