By the time most Canadians sit down to organize their various tax slips and receipts and undertake to complete their tax return for 2015, the most significant opportunities to minimize the tax bill for the year are no longer available. Most such tax planning or saving strategies, in order to be effective for 2015, must have been implemented by the end of the calendar year. The major exception to that is, of course, the making of registered retirement savings plan (RRSP) contributions, but even that had to be done on or before February 29, 2016 in order to be deducted on the return for 2015.
The fact that the clock has run out on most major tax planning opportunities for 2015 doesn’t however, mean that there are no tax-saving strategies left. At this point, there are a couple of ways to minimize the tax hit for 2015 — by claiming all available deductions and credits on the return and also by making sure that those deductions and credits are claimed in the way which will give the taxpayer the most “bang for the buck”.
The Canadian tax system, and therefore the Canadian income tax return form, is complex and subject to constant revision. It’s not surprising, therefore, that it’s easy to miss out on deductions or credits which are available, or to fail to recognize that the way in which such deductions or credits are claimed can have a significant effect on how much tax is saved. Realistically, most Canadians deal with taxes only once a year, when filing the annual return, and spend as little time as possible doing so. Almost no one reads the annual tax guide thoroughly, or reviews the information on the Canada Revenue Agency’s (CRA’s) website closely, looking for opportunities for tax savings.
Everyone’s tax situation — and, therefore, their tax return — is different, of course, but what follows is an outline of deductions and credits which are commonly claimed by Canadians, and the ways in which structuring those claims properly can maximize the tax benefit.
Splitting income within the family unit
Income splitting is likely the strategy which has the greatest potential to create tax savings within a family. Briefly stated, income splitting works because Canada has a “progressive” tax system, meaning that tax rates increase as income rises. So, a family which has a single income earner earning $100,000 per year will pay more in tax than a family in which two income earners make $50,000 each, even though total family income is the same in both cases.
Of course, every dollar of tax saved by Canadian taxpayers means one dollar less of revenue for federal and provincial governments, so the ability to split income is tightly regulated. On the 2015 tax return, there are two broadly available income splitting opportunities.
The first is the so-called “Family Tax Cut”, which allows one spouse to transfer (on paper only — no actual transfer of funds is required) up to $50,000 in taxable income to his or her spouse, and have that income taxed in the hands of the spouse. The amount of tax which can be saved through this income splitting mechanism is, however, capped at $2,000 per family per year. The Family Tax Cut is claimed on Schedule 1-A, which is provided as part of the 2015 General Income Tax and Benefit package. More information on the Family Tax Cut is available on the CRA website.
Taxpayers who may be able to claim the “Family Tax Cut” should be aware that this year’s return will be their last opportunity to do so. In the recently released 2016 federal Budget, it was announced that the Family Tax Cut would be eliminated, effective as of the 2016 tax year.
The second income splitting opportunity for 2015 is available to older married Canadians who receive private pension income during the year. Those taxpayers are entitled to allocate up to half that income to a spouse for tax purposes. Unlike the Family Tax Cut, there is no absolute dollar limit or cap on the amount of income which can be transferred or the amount of tax which can be saved through pension income splitting. For purposes of pension income splitting, private pension income generally means a pension received from a former employer and, where the income recipient is over the age of 65, also includes payments from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting.
The mechanics of pension income splitting are relatively simple. There is no need to transfer funds between spouses or to make any change in the actual payment or receipt of qualifying pension amounts, and no need to notify a pension plan administrator.
Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032E(12) Joint Election to Split Pension Income with their annual tax return. That form, which is unfortunately not included in the general tax return package issued by the CRA, can be found on the CRA website. As well, the General Income Tax Guide provides only a minimal amount of information on pension income splitting: much more extensive and detailed information on qualifying income, mechanics, benefits, and tax results of the strategy can be found on the CRA website.
Determining when to claim a credit for charitable deductions
Canadians who make donations to registered charities are entitled to claim a non-refundable charitable donations tax credit for those donations, for both federal and provincial/territorial tax purposes. The amount of the provincial/territorial credit will vary by jurisdiction: for 2015, the federal credit is calculated as 15% of donations up to $200, and 29% of donations over that amount.
Canadians are entitled to make a claim on the annual return for charitable donations made in the current (2015) year, or in any one of the previous five years. While it may seem counter-intuitive not to claim a contribution made during the year, in some cases a better tax result may be obtained by waiting.
For taxpayers whose total charitable donations made during 2015 amount to more than $200, the full claim should be made on the 2015 return — there is no benefit to such taxpayers in delaying the claim. Where, however, total charitable donations made during the year do not exceed that $200 threshold, it may be better to wait. For example, a taxpayer who contributes $150 to charity in a year and claims that amount on the return will receive a 15% credit. Where the same taxpayer makes a similar $150 donation in the next year and claims the entire $300 in donations on that year’s return, he or she can receive a credit of 15% on the first $200 and a higher rate on the balance of $100 in donations.
Aggregating medical expenses within a family
While many medical expenses of Canadians (doctor’s visits and hospital care) are covered by public health care plans, there is a long list of such expenses (like prescription drugs and dental care) which must be paid for out-of-pocket. For some Canadians, those costs are covered by an employer-sponsored plan, but for many others there is no public or private coverage.
What there is for such taxpayers is the ability to claim a federal tax credit equal to 15% of qualifying medical expenses. Each of the provinces and territories also offers a medical expense tax credit, with the percentage amount varying by jurisdiction.
In all cases, the credit for medical expenses can be claimed only on such expenses which exceed 3% of the taxpayer’s net income, or $2,208, whichever is less. It’s possible, however, for all medical expenses of both spouses and all children who were aged 17 and under at the end of 2015 to be combined and claimed by either spouse. So, while the medical expenses incurred by a single family member might not be enough to allow him or her to make a claim, aggregating those expenses may well mean that total expenses are enough to go over the 3% of net income/$2,208 threshold.
In structuring the medical expense claim, there are two points to remember. Since total medical expenses claimable are those which exceed 3% of net income, or $2,208 —whichever is less — the most benefit will be obtained if the spouse with the lower net income makes the claim for total family medical expenses. However, the medical expense credit is a non-refundable one, meaning that it can reduce tax payable, but cannot create or increase a refund. Therefore, it’s necessary that the spouse making the claim have tax payable for the year of at least as much as the credit to be obtained, in order to make full use of that credit.
More information on the kinds of expenses which qualify for the medical expense tax credit and on how to best structure the claim for that credit can be found on the CRA website.
