While tax planning is best approached as an ongoing, year-round activity, the fact is that for most Canadians the subject of taxes becomes top of mind only a few times a year. Typically, that happens when the annual tax return is due, when the annual RRSP contribution deadline is looming, and for some, at the end of the calendar year.
There is, in fact, good reason to spend some time considering one’s tax situation as the end of the calendar year approaches. With the notable exception of (in most cases) contributing to one’s RRSP, any steps taken in order to reduce one’s income tax bill for 2016 must be finalized by December 31st of this year.
What follows is a list of the most common tax considerations that arise as the end of the calendar year approaches.
Timing of medical expenses
Where Canadians incur medical expenses which aren’t covered by government health insurance or by a private medical insurance plan, they can often claim a tax credit to help offset those expenses. Unfortunately, the computation of such expenses and, in particular, the timing of making a claim for the credit, can be confusing. The basic rule is that qualifying medical expenses (a list of which can be found on the Canada Revenue Agency website) in excess of 3% of the taxpayer’s net income, or $2,237, whichever is less, can be claimed for purposes of the medical expense tax credit.
Put in practical terms, the rule for 2016 is that any taxpayer whose net income is less than $74,600 will be entitled to claim medical expenses that are greater than 3% of his or her net income for the year. Those having income over $74,600 will be limited to claiming qualifying expenses which exceed the $2,237 threshold.
The other aspect of the medical expense tax credit which can cause some confusion is that it’s possible to claim medical expenses which were incurred prior to the current tax year, but weren’t claimed on the return for the year that the expenditure was made. The actual rule is that the taxpayer can claim qualifying medical expenses incurred during any 12-month period which ends in the current tax year, meaning that each taxpayer must determine which 12-month period ending in 2016 will produce the greatest amount eligible for the credit. That determination will obviously depend on when medical expenses were incurred, so there is, unfortunately, no universal rule of thumb which can be used.
Medical expenses incurred by family members – the taxpayer, his or her spouse, dependent children who were born in 1999 or later, and certain other dependent relatives – can be added together and claimed by one member of the family. In most cases, it is best, in order to maximize the amount claimable, to make that claim on the tax return of the lower-income spouse, where that spouse has tax payable for the year.
As December 31 approaches, it is a good idea to add up the medical expenses which have been incurred during 2016, as well as those paid during 2015 and not claimed on the 2015 return. Once those totals are known, it will be easier to determine whether to make a claim for 2016 or to wait and claim 2016 expenses on the return for 2017. And, if the decision is to make a claim for 2016, knowing what and when medical expenses were paid will enable the taxpayer to determine the optimal 12-month waiting period for the claim.
Finally, it is a good idea to look into the timing of medical expenses which will have to be paid early in 2017. It may make sense, where possible, to accelerate the payment of those expenses to December 2016, where that means they can be included in 2016 totals and claimed on the 2016 return.
Charitable donations
The federal and all provincial governments provide a two-level tax credit for donations made to registered charities during the year. To claim a credit in a particular tax year, donations must be made by the end of that calendar year. There is, however, another reason to ensure donations are made by December 31. For federal tax purposes, the first $200 in donations is eligible for a non-refundable tax credit equal to 15% of the donation. The credit for donations made during the year which exceed the $200 threshold is, however, calculated as 29% of the excess.
As a result of the two-level credit structure, it makes sense to aggregate donations in a single calendar year where possible. A qualifying charitable donation of $400 made in December 2016 will receive a federal credit of $88 ($200 ×15% + $200 × 29%). If the same amount is donated, but the donation is split equally between December 2016 and January 2017, the total credit claimable is only $60 ($200 × 15% + $200 × 15%), and the 2017 donation can’t be claimed until the 2017 return is filed in April 2018. And, of course, the larger the donation in any one calendar year, the greater the proportion of that donation which will receive credit at the 29% level rather than the 15% level.
It’s also possible to carry forward, for up to five years, donations which were made in a particular tax year. So, if donations made in 2016 don’t reach the $200 level, it’s usually worth holding off on claiming the donation and carrying forward to the next year in which total donations, including carryforwards, are over that threshold. Of course, this also means that donations made but not claimed in any of the 2011, 2012, 2013, 2014, or 2015 tax years can be carried forward and added to the total donations made in 2016, and then the aggregate claimed on the 2016 tax return.
When claiming charitable donations, it’s possible to combine donations made by oneself and one’s spouse and claim them on a single return. Generally, and especially in provinces and territories which impose a high income surtax – currently, Ontario and Prince Edward Island – it makes sense for the higher income spouse to make the claim for the total of charitable donations made by both spouses.
For Canadians who have not been in the habit of making charitable donations, there is now an additional incentive to make a cash donation to charity. In the 2013 Budget, the federal government introduced a temporary (before 2018) charitable donations super-credit. That super-credit (which can be claimed only once) allows individuals who have not claimed a charitable donations tax credit in any tax year since 2007 to claim a super-credit on up to $1,000 in cash donations made during the year. The super-credit works by providing an additional 25% credit for cash donations. Consequently, when the super-credit is combined with the regular charitable donations tax credit, the total credit claimable is equal to 40% (15% + 25%) of donations under $200 and 54% (29% + 25%) of donations over the $200 threshold.
Reviewing Tax Instalments for 2016
Millions of Canadian taxpayers (particularly the self-employed and retired Canadians) pay income taxes by quarterly instalments, with the amount of those instalments representing an estimate of the taxpayer’s total liability for the year.
The final quarterly instalment for this year will be due on Thursday December 15, 2016. By that time, almost everyone will have a reasonably good idea of what his or her income and deductions will be for 2016 and so will be in a position to estimate what the final tax bill for the year will be, taking into account any tax planning strategies already put in place, as well as any RRSP contributions, which will be made before March 2, 2017. While the tax return forms to be used for the 2016 year haven’t yet been released by the CRA, it is possible to arrive at an estimate by using the 2015 form. Increases in tax credit amounts and tax brackets from 2015 to 2016 will mean that using the 2015 form will likely result in a slight over-estimate of tax liability for 2016.
Once one’s tax bill for 2016 has been calculated, it is possible to compare that figure with the total of tax instalments already made for 2016, (that figure can be obtained by calling the CRA’s Individual Income Tax Enquiries line at 1-800-959-8281) and to determine whether the tax instalment to be paid on December 15 can be adjusted downward.
