As Benjamin Franklin once said: "If you fail to plan, you're planning to fail."
Working in the tax industry, I am always surprised by the number of people who think tax planning only happens when they file their return. Waiting until March or April to do your tax planning is not recommended if you want to pay the least amount of tax legally possible.
Every year, millions of Canadians wait until the last week to file tax their return, with one in five admitting that they file just in time. Ideally, tax planning should be a year round activity where you see the benefits when you file your return. Whether you get a refund or owe the government, your tax return should not be a surprise at filing time.
It does not have to be an onerous task. Collecting receipts and asking some simple questions can help make filing much easier next year.
Are you ready?
Did you have any major life changes in 2015? Medical expenses, the birth of a child or selling an asset can all have tax implications. Hopefully you have kept all potential tax paperwork in one place so you can easily find it. If you are missing a receipt, then you should get a duplicate so you don't miss out on any tax savings.
Confused about what you should be keeping? Your T4s won't arrive until after the New Year, but other documents such as tuition and education receipts, transit passes, medical receipts and stock transaction receipts may arrive in 2015. You may also have RRSP contribution slips, childcare expenses and charitable donations. For other income slips coming in 2016, set calendar reminders to remind you.
If you moved this year, then now is a good time to notify your bank and past employers so tax documents arrive at the right address. Remember, you are responsible for reporting your annual income so a missing T4 slip is your problem.
Kids can be expensive, but parents can claim a number of credits and deductions to help lower their tax bill a little.
Watching your child's holiday performance at daycare is always a fun and heartwarming experience. When it comes to daycare and other childcare expenses, for children under seven, parents can claim childcare expenses to a maximum of $8,000. For children seven to 16, the maximum is $5,000. Children with disabilities qualify for a larger deduction but you must have an approved Form T2201 - Disability Tax Credit Certificate.
If you signed your child up for fitness activities in 2015, then you might be eligible for the Children's Fitness Tax Credit, a 15 per cent refundable credit based on registration costs of up to $1,000. Remember, your activity must meet the requirements and the organization must provide you with a receipt. Equipment cannot be claimed.
Many kids in university will be coming home after a semester of hard work and fun. It's a good time to chat with them about managing their taxes and finances so they can think about planning for life after university. Most universities and colleges make the Form T2202A available online for download. This allows a student to claim tuition as well as the education amount and the Textbook Tax Credit. The student must claim all the credits that they need first before they can transfer up to $5,000 to a parent, grandparent or spouse.
Did you take care of yourself?
Medical expenses are often some of the most missed credits each year, so familiarize yourself with the eligible expenses list. While it's quite lengthy, it is a good resource for knowing what can be claimed and deducted.
You can time your medical expenses to get the best refund. You are allowed to claim your best 12 months as long as one of the months ends in the tax year. It may sound a bit confusing, but it is easier than you think. For example, let's say you have some major dental work completed at the end of 2014 and the beginning of 2015. You can claim medical expenses from September 2014 to August 2015 on your 2015 tax return. Your tax savings on medical expenses depend on the amount and your income, so the more receipts you have, the better chance you have of saving money.
Don't wait until it is too late.
Waiting until April 2016 to try and reduce your 2015 tax bill is too late. By getting organized now, you will give yourself the best opportunity to learn about, and identify the credits and deductions you can claim. This will lead to the best chance of paying the least amount of tax.
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Keep a copy of every investment account in which you have non-registered funds and make sure you have a T-slip for all the investment income (dividends, interest, capital gains) you earned during the year.
Locate your notice of assessment from the year before to see the exact amount of RRSP contribution you can make this year. Also, check if there are any unclaimed contributions.
From that same notice of assessment document, check to see if there are any expenses that have been carried forward that you may use this year.
If your income is going to be substantially higher next year, do not claim your RRSP contribution this year. Wait until the following year when you are in a higher tax bracket to claim it.
If you have children currently enrolled in post secondary education, consider transferring the tuition credit to your own tax return.
If you or anyone in your family has a medical condition that restricts your daily activities, consider filing for the disability tax credit. You may be able to recover this tax credit as far back as 10 years – which is equal to about $1,500 a year.
If applicable, don't forget to record the capital gain on the sale of your cottage in Canada or vacation property outside the country. However, you may not always have to declare your summer home. Talk with your accountant to see what makes better financial sense. If the cottage, for example, has increased substantially more in value than the house you currently reside in, it may make sense to declare the summer home as your principal residence. Remember, this move does not attract capital gains and defers paying capital gains on the home you reside in.
If you need to travel outside of your region for medical care, don't forget to claim meals and travel for yourself and your spouse.
If you live in a household with two taxpayers, consolidate donations and have one taxpayer claim them all. This way the tax credit increases substantially on donations over $200.
If your income is low, don't forget to report your rent or property taxes in order to qualify for provincial tax breaks for rent and/or an HST refund, for example.
Stuck? Get in touch with an accountant. To be extra cautious, ask if they attend tax update seminars through the year to stay current. Avoid people who strictly rely on tax software.
This year, keep a file handy to hold all of your receipts and other documents required for filing taxes. This way, everything will be in the same spot come April of 2015.
Follow Caroline Battista on Twitter: www.twitter.com/Caroline_HRB