Most people doing their income tax returns don't think twice about claiming all their deductions immediately, but there are cases where a little knowledge and patience can turn into a big payoff.
Generally, most deductions and credits Canadians are eligible to claim through the tax system must be claimed in the year in which you earned them. There's usually no leeway to defer them to a later year.
This article is about the exceptions to that rule — those few credits and deductions that taxpayers are free to put off until a later year when the person's income will be higher or when the realized tax benefit will be greater.
It turns out there are some situations where you'll get a bigger payoff by putting off some of your favourite tax-saving moves until the future.
Here are the main ones:
When to delay claiming your RRSP contribution
You can contribute to your RRSP at any time. But that doesn't mean you have to take the deduction in the year you made it.
"You can structure your deductions to make sure they apply in a year that you know you will have higher income," says James Gustafson, a chartered accountant at Victoria-based Gustafson Accounting. "For example, you may choose to defer claiming RRSP contributions if you know that your income will increase substantially in the following year and place you into a higher tax bracket."
Delaying your RRSP deduction could really pay off. Here's one example: let's say you live in Ontario and earned $40,000 in 2011 and made a $3,000 RRSP contribution. If you claimed it in the 2011 tax year, the tax savings would be about $635, as your marginal tax rate (federal and provincial combined) at that level of income is about 20 per cent (varies by province).
But if you expect to earn $60,000 in 2012, you will be paying tax at a 31 per cent marginal rate. So that same $3,000 deduction would be worth about $935 if you deferred it from the 2011 tax year to 2012. That's an extra $300 in your pocket just for delaying the deduction for a year.
A quick glance at how tax brackets are structured is a worthwhile exercise here. KPMG has a table here that lists the various tax brackets for each province for the 2011 tax year. Similarly, if you won't owe tax at all in 2011 — either because you had little income or had significant business losses that offset other income — you won't want to take that deduction immediately. Better to carry it forward on Schedule 7 until a year when you have taxable income.
There are also situations when you may want to claim only part of an RRSP contribution and carry forward the rest.
Let's assume a woman in Ontario got an inheritance or arranged a top-up RRSP loan and plunked $15,000 into her RRSP in 2011. Let's also assume she made $50,045 that year and will make a similar amount in 2012.
The experts say she should consider deducting only the amount needed to get to the start of her current tax bracket.
In this case, she should claim only $8,500 for 2011. That would reduce her income for tax purposes from $50,000 to $41,545, where the 31 per cent marginal tax bracket starts. If she were to deduct any more than that $8,500, the tax savings on the excess would be based on the lowest tax bracket — about 20 per cent. So, she should instead carry forward the remaining $6,500 deduction to the 2012 tax year, when she will get the full 31 per cent refund for the entire contribution.
It's also important not to look at the RRSP carry-forward question in isolation.
"The RRSP is a deduction that reduces net income on your tax return, and net income is used to calculate your refundable and non-refundable tax credits," points out Evelyn Jacks, author of Essential Tax Facts and the president of the Winnipeg-based Knowledge Bureau.
"So, we look at the effect of an RRSP deduction on all those things before we make a decision on whether or not to defer an RRSP deduction."
Jacks says tax programs are good at storing data so you can keep track of your tax situation from one year to the next. "You need to keep on top of your carry-forwards."
Another beneficial delay scenario
Myron Knodel, director of tax and estate planning at Investors Group in Winnipeg, offers another instance where it can make sense to delay claiming RRSP contributions.
“For people who are approaching age 65 who feel they might be eligible for the Guaranteed Income Supplement (GIS), they may want to delay claiming their RRSP contributions for several years and save them up until they’re 65,” he says.
Well, RRSP contributions drive down net income for tax purposes, and the GIS is designed for those with only very modest incomes. Seniors are allowed to earn only $3,500 in net employment income (apart from the OAS and GIS) before GIS payments start to get clawed back at the punishing rate of 50 cents on the dollar.
What this means is that seniors who delay claiming, say, $10,000 in total RRSP contributions they made earlier in their 60s could conceivably save themselves from having their GIS clawed back by waiting until they’re 65 and claiming it all then.
“That [RRSP] deduction could drive their income to a low level,” Knodel says. “Beginning in June of the following year, the GIS will be based on that low income level. It could give seniors entitlement to more of the supplement for at least that year.”
How much more? At a 50 per cent clawback rate, that $10,000 RRSP deduction could result in a saving of $5,000 that would otherwise be clawed back from their GIS payment. Plus, they would be able to claim the regular RRSP tax deduction, too.
When to delay charitable contribution claims
Charitable contributions give donors a two-tier credit. On the first $200, contributions generate a 15 per cent federal tax credit. On amounts over $200, the credit is 29 per cent. So, tax specialists say if you don't crack the $200 limit one year, it could benefit you to delay making that claim.
A $200 claim in each of two years would yield a tax credit of $30 each year, for a total of $60. But a $400 claim in one year would yield a federal tax credit of $30 for the first $200 and $58 for the second $200, for a total of $88. Add in provincial tax credits and the difference is even larger.
"The CRA's administrative policy also allows a donation made by one spouse to be split between the two spouses in whatever proportion they choose," say the experts at KPMG in Tax Planning for You and Your Family 2012. "Further, spouses may be able to claim each other's unused charitable donation carry-forwards from a prior year."
One more point: charitable contributions can be carried forward up to five years, unlike RRSP contributions, which can be carried forward indefinitely.
When to delay moving expense claims
The tax department allows you to deduct moving expenses when you start working at a new place and move to a home that is at least 40 kilometres closer to your new work location than your old home was.
Those moving expenses can be huge. With housing so expensive these days, real estate commissions alone can easily amount to $20,000 in many cities. Add in legal and other relocation costs, and the total moving bill can top $30,000.
These expenses are claimed against income at the new location. So, if you moved in October and only made $20,000 in your new location in the rest of that year, you can deduct $20,000 of your moving expenses in that first year and carry forward the other $10,000 in unused expenses to the next year.
When to delay medical expense claims
Medical expenses above a certain threshold give rise to a 15 per cent federal refundable tax credit. Qualifying medical expenses that exceed three per cent of your net income (to a maximum of $2,052 in 2011) are eligible for the credit. What many people may not realize is that the expense claim does not need to be based on a single calendar year.
"Medical expenses can be claimed in any 12-month period ending in the tax year you're filing for," Jacks tells CBC News. "You can choose not to claim your medical expenses this year if you think you're going to have a better claim in a 12-month period ending in the next tax year."
KPMG also points out that the key is when the expenses are paid, not when the service was performed.
"If you are using a December end for the 12-month period, and you have pending expenses (perhaps for medical equipment purchases or large dental bills) that are due early in the new year, consider prepaying them so that you can claim them one year earlier."
When to delay education tax credit claims
If students don't need to use the tuition tax credit, the education amount or the textbook tax credit because they have no tax to pay, they can transfer those credits to their spouse, common law partner or even a parent or grandparent.
They can also carry forward any tuition, education or textbook credit they didn't use or didn't transfer to any future year when they will have tax to pay.
When it comes to tax planning, it's sometimes a question of timing.
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