When it comes to saving money on your taxes, there are some simple tips and tricks that everyone can follow to maximize their tax savings or refund. For instance, almost everyone knows an RRSP contribution will reduce taxable income, but not many people know that you don’t even need cash to contribute to a TFSA or that you get to keep your TFSA if you leave Canada.
Knowing what tax savings opportunities are available to you, let alone how to maximize them, is a difficult task for anyone. In this article, we’ll dive in deep and give you an overview of most of the ways you can reduce your tax bill along with tips for making the most of each deduction or strategy.
Pick A Topic
This is a lengthy article, and while it is worth a read in its entirety, you may want to quickly jump to a section you have a particular interest in. Use the links below to do this:
- Tax Savings For Everyone:
- Tax Savings For Families:
- Tax Savings For Investors:
- Tax Savings For Students:
- Tax Savings For Seniors:
- Tax Savings For Those With A Disability:
- Other Specialized Tax Savings:
- Fixing Errors On A Tax Return
Plus a travel bonus worth another $150.
Quantities are limited.
Tax Savings For Everyone
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is a type of investment or savings account available to Canadians that allows for the deferral of taxes.
RRSP contributions are deductible for tax purposes, which means they can be deducted from total ‘earned income’ in any given contribution year. CRA defines earned income as income earned by the taxpayer and generally includes employment income, rental income, taxable child support payments, unemployment benefits and CPP disability benefits received. RRSP contributions are limited to 18% of your ‘earned income’ and the maximum contribution for 2016 is $25,370.
In general, it is only advantageous to contribute to an RRSP if your marginal tax rate (in the year you made the contribution) is higher than your expected marginal tax rate when the withdrawals are made. This is the case for most people as they usually make their withdrawals upon retirement when their income is lower (which means a lower marginal tax rate).
One key aspect of an RRSP is that the earnings are allowed to grow free of taxes within the account, but withdrawals are fully taxable. The withdrawals are taxed at the marginal tax rate in the year of withdrawal. Marginal tax rate is the rate of taxes paid on additional income.
You can use this to your advantage by strategically timing your withdrawals to save on taxes. You could save big on taxes by making RRSP withdrawals in a year of little/no income such as taking a year off to travel, study, or pursue other interests. If you know you will have a year with minimal income in the future but you currently earn a full-time income, you may want to consider delaying your RRSP withdrawals and save them for years when your income is lower. The amounts will still be taxed but the marginal rate of taxes will be lower assuming your total RRSP withdrawals are less than your full-time income.
In a no income year, you can make withdrawals up to the Basic Personal Amount, without paying any taxes at all.
Related: RRSP Vs. TFSA
Tax Free Savings Accounts (TFSA)
The Tax Free Savings Account (TFSA) is a savings or investment account open to Canadians aged 18 and older. It was created on January 1, 2009 to encourage Canadians to invest and save for their retirement.
The income (capital gains, dividends, interest, etc.) earned within the these accounts are completely free of taxes. This is based on the assumption that the original plan contributions have already been taxed when you earned the income. Unlike an RRSP, contributions made to a TFSA are not deductible for taxes. That means they won’t trigger a refund or a large reduction of your tax bill in the year you make a contribution, but there will be no more taxes to pay on income earned by your TFSA accounts ever, even when you withdraw.
TFSA withdrawals can be done at any time and are not taxed. There is no withdrawal limit for the TFSA and any unused contribution room in one year is automatically carried forward to the next year.
Income earned in a TFSA will continue to accumulate until the funds are withdrawn.
The annual contribution limit is currently $5,500 per person. Last year it jumped up to $10,000 before the new Liberal government decided to drop it back down to $5,500 again. Prior to 2013 the annual limit was $5,000. In 2016 if you have never contributed to a TFSA you would have $46,500 of available contribution room. The government uses the Consumer Price Index to adjust the TFSA annual contribution limit in $500 increments.
Any investment that is eligible for an RRSP is also eligible for a TFSA – including publicly traded shares, eligible shares of private companies, warrants, rights and options, GICs, and regular savings accounts among many other investments.
Foreign Withholding Taxes
Unlike an RRSP, a TFSA is not considered as a pension plan by the US federal government. This means there is a 15% U.S. withholding tax on all dividends received from U.S. companies. For this reason, many people hold U.S. dividend shares in an RRSP instead of a TFSA to avoid the 15% withholding tax.
There are several advantages of a TFSA:
- You don’t need cash to contribute to a TFSA, you can contribute equities from another investment account – even an RRSP. Keep in mind that the transfer of equities may have tax implications such as an RRSP withdrawal which would trigger taxes on the amount of the withdrawal.
- Capital gains, interest, and other income earned are carried forward to future years. If you hold a stock within your TFSA and it increases substantially in value and you sell the stock for a large gain and withdraw the money, the amount of the withdrawal (including the gain) will be added to your contribution room the following year.
- Spousal contributions are not attributed to the contributing spouse. Normally with a non- registered investment account if someone gives their spouse money to make an investment, the gains on the investment are taxed in the hands of the person who loaned the money. With a TFSA, couples can contribute to each other’s TFSA with no tax consequences.
- You can keep your TFSA if you leave Canada. If you ever move and become a non-resident of Canada, you still get to keep your TFSA and don’t have to pay taxes on any withdrawals. In this case it’s important to note that as a non-resident you wouldn’t create any new contribution room in the future.
- TFSAs are great to contribute to in lower income years (when you're young) and withdraw from in higher income years. You could even withdraw from your TFSA in a super high income year and use the money to contribute to your RRSP to effectively lower your income for that year and save on taxes.
Every employed person is eligible for this tax credit, except for self-employed individuals, so you better make sure that you claim it!
It started at $1,000 in 2007 and has rose with inflation up to $1,146 for the 2015 tax year. It’s a non-refundable tax credit, so that means the actual amount you will save is 15% of that number, meaning $171.90 in savings this year. If you’re using a tax program and enter your employment income, you’ll automatically be given this tax credit.
Public Transit Amount
This credit is available for anyone who purchases public transit passes for their own personal use or for use by a spouse or children under 19 years old. The transit passes must be for transit services available to the public (school bus costs do not count). The credit is designed for monthly transit passes with some exceptions for daily/weekly passes. Almost all forms of public transit are eligible for the credit, and they must allow for unlimited travel (within the allotted time limit stated on the pass/ticket).
Medical expenses are considered to be one of the most well-known but least-used tax credit available to all taxpayers. Most people know they can claim eligible medical expenses on their tax returns but most people either don’t keep track or assume since their medical costs are relatively low that they won’t make a difference.
A non-refundable tax credit is available for eligible medical expenses paid by the taxpayer, their spouse, common law partner or dependents.
The medical expenses don’t even have to fall within the tax year, so long as they are claimed for any 12 month period that ends in the tax year. For example, on your 2015 tax return you can claim medical expenses paid in November 2014. In this case you could claim all medical expenses paid between November 2014 and November 2015. When medical expenses are claimed for someone who has passed away, the eligible period is extended to 24 months.
All eligible medical expenses can be claimed even if they were paid outside of Canada. You’ll want to make sure you have receipts for all expenses paid and keep them with your tax return in case you are audited by CRA. If you have an insurance plan that pays for medical costs, you can only claim the amount that was not reimbursed to you by the insurance company.
One easy way to keep track of all receipts is to have all prescriptions filled at the same location. Some pharmacies are able to print annual receipts, which is easier to track than keeping a large number of individual receipts paid throughout the year.
Medical expenses higher than the lesser of: $2,208 (for 2015) or 3% of net income can be claimed. In most circumstances it makes sense for the lower income spouse to claim all medical expenses because of the lower threshold. The lowest marginal federal tax rate (15%) is applied to eligible medical expenses. This means that if you have $3,000 of medical expenses, you’ll get a tax credit of $450 ($3,000 x 15%).
The list of eligible medical expenses is large, but some of the more common expenses are:
- Doctors and dentists charges.
- Prescription drugs.
Nursing home costs
Costs of travel to obtain medical services not available in your immediate area.
Home renovations undertaken to improve mobility for those with mobility impairments.
Costs of a full-time attendant for a disabled person.
Bathroom aids for those with mobility impairments.
Cosmetic surgery to address a congenital abnormality.
Costs to replace a furnace for those with a respiratory ailment (prescription required).
Cost difference between regular and gluten-free food for those with celiac disease.
Tutors (for those with a learning disability).
Health plan premiums (paid personally and not by an employer).
For a full list of eligible medical expenses and any applicable restrictions, click here.
Refundable Medical Expense Supplement
For those with high medical costs and low income, a supplementary tax credit is available called the refundable medical expense supplement.
This is available to anyone who is a Canadian resident, 18 years of age (or older) and has employment/self-employment income greater than approximately $3,500 in the previous year. The maximum supplement is $1,172 and it is only available to those with a combined (family) net income of $49,379 or less.
More information is available by clicking here.
If you’ve moved for work you’re likely aware you are allowed to deduct the expenses related to the move.
Moving expenses can add up fast so it’s important to keep receipts for all your costs. Moving expenses are also valuable on a tax return because they allow you to deduct the moving expenses from the income earned at the new job – this means your income (and marginal tax rate) can go down.
In order to qualify you must have moved over 40km closer to where your new work is located and you must be a factual or deemed resident of Canada. You can even claim this expense if you are moving out of Canada or if you are already living outside of Canada and are moving somewhere else outside of Canada for work.
Related: How To Save Money On Gas
Students can also claim moving expenses if they are moving to attend post-secondary school on a full-time basis. Students can claim moving expenses against the income from scholarships or grants they may have received during the year. They can also claim the moving expenses against any income earned through part time or summer jobs. The student must be attending post-secondary with at least a 60% course load (considered full-time).
Eligible Vs. Ineligible Moving Expenses
The following are examples of eligible moving expenses:
- Transportation and storage costs (gas, movers, storage costs while in transit, insurance fees).
- Travel costs (meals and hotel costs while on the road travelling to your new place).
- Lease cancellation costs (at your old place).
- Various miscellaneous moving costs such as the cost to change your address, replacing legal documents, utility hook-up and disconnection costs).
- Costs to maintain your old home – up to $5,000 (interest, property taxes, insurance premiums, heating costs).
The following are examples of ineligible moving costs:
- Renovations performed on your old home in order for it to sell.
- Losses from the sale of your old home.
- Travel expenses while house-hunting prior to the move.
- The value of items that didn’t get moved (personal and household items) for whatever reason.
- Costs to forward your mail to your new home.
- Mortgage default insurance.
- Costs to replace personal items such as firewood, curtains, carpets, etc.
- Costs to clean or repair a rented residence prior to moving out.
- Any moving costs that were reimbursed to you (such as through your employer).
- Any costs for which you don’t have the supporting documents (receipts, invoices, etc) – unless you’re using the simplified method (see below).
In general, all costs must be directly related to the move itself and must have all supporting documents such as receipts or invoices.
Eligible Income Types
In general only actively earned income from your new work is eligible for moving expenses to be deducted from.
The most common examples of actively earned income are salary, wages or self-employment income.
All types of investment income are not eligible.
In order for the moving expenses to be deductible the income must be actively earned in your new place of employment.
The Simplified Method
The simplified method of claiming moving expenses on your tax return can be used for anyone who doesn’t have receipts/supporting documentation for the costs they paid for.
Under the simplified method you can claim a flat rate of $17 per meal (daily maximum of $51 per person, per day) while moving. Vehicle expenses such as fuel can be claimed using a specific rate set by the government each year which is based on the province that the trip began. The rate is multiplied by the number of kilometers driven to arrive at a total travel cost.
Related: Top Credit Cards For Gas Savings
Using the simplified method you don’t need receipts for the costs incurred. This method is quick to calculate and easy to understand but should only be used by those who didn’t keep the receipts from their move.
If you incurred significant eligible expenses such as home maintenance costs (costs to maintain your old home) you’ll want to use the traditional method instead since you’d have a bigger deduction. If you choose to do this, make sure you have receipts for all your costs.
Click here for more information on deducting your moving expenses.
Home Buyers’ Amount
If you or your spouse purchased your first home in 2015, you may be eligible for a $5,000 tax credit geared towards helping with the costs of buying a home. In order to be eligible for the credit, two criteria need to be met: you or your spouse need to have purchased a ‘qualifying’ home in 2015 and you or your spouse must not have lived in a home owned by either of you for the previous 4 tax years. A ‘qualifying home’ is essentially the most common forms of housing: a single detached home, semi-detached, townhouse, condo or apartment in a duplex/triplex. The credit is for $5,000 which means you can get $750 if you qualify (15%).
Keeping track of any donations you make, big or small, can really add up at tax time. The federal government will give you a tax credit of 15% of the first $200 you donate within the year and then it jumps to 29% on any amount above and beyond $200.
Each province also has charitable donation tax credits that stack with the federal ones. You can see what the rates for your province are using this handy table.
If you are the type of person who coupons a lot or tries to maximize rewards, a good way to donate to charity is to buy useful products with hefty bonuses and then donate them to a charity while asking for a receipt. This way you get the tax refund from the government, get to keep the bonuses, and help out a worthy cause at the same time.
Charitable Donation Super Credit
This credit is available to anyone who hasn’t made a charitable donation in the past 5 years to help encourage people to start donating. It gives an additional 25% credit for first time donators on the first $1,000 that they donate.
There are ways to increase the value of your donation further such as donating shares of a company that has increased in value substantially. If you donate those shares, instead of the equivalent amount of money in cash, you won’t have to pay tax on the capital gains you would have had to pay when you sold the investment. That way you get both the tax credit for the fair market value of the shares, plus you don’t have to pay additional taxes on your gains. It’s a great way to help a worthy cause while maximizing your tax savings.
Deductible Employment Expenses
If you have a small business, there are many opportunities for you to deduct certain expenses to save on taxes. Those rules can be complicated and are out of the scope of this article. However, regular employees can also very rarely deduct some expenses for things they are required to buy as part of their job. This list of exclusions is long and you can't deduct most ordinary things like clothes, even if you are required to wear a certain attire for your job.
The type of deductions available range depending on if you are a salaried, commissioned, or transportation employee. There are also special rules for forestry workers, employed artists, and employed tradespersons.
You are also need to have your employer fill out and sign form T2200 proving that they require you to spend money on these things for your job.
A common type of expense would be for costs related to your motor vehicle if you are often required to work away from your employers place of business, but are not reimbursed by your employer for those costs. You can also deduct travelling expenses like food, beverage, and lodging if you are required to travel and are not reimbursed.
Another big one is if you work from home more than 50% of the time. Many of your home office expenses like heating costs, electricity, light bulbs, and maintenance costs can be deducted. However, the expense you are deducting must be directly related to your income earning activities and you can only claim a portion of the total cost equivalent to the percentage area your office space takes up in your home. You also have to factor in roughly how much you use the space for work activities vs. personal activities.
For more information on deductible employment expenses, click here.
Tax Savings For Families
Family Tax Cut (Income Splitting For Families)
For those of you not familiar with income splitting, it involves allocating income from one person (the higher income earner) to another person (the lower income earner). Since the marginal tax rate of the higher income earner would be higher, moving the income to the lower income earner means it still gets taxed but at a lower rate.
This tax credit benefits families with a large discrepancy of incomes between the spouses. For example, if both spouses earn $60,000 per year they are unlikely to see any benefit from the new tax credit. A family where one spouse earns $90,000 and the other earns $25,000 will see a much greater benefit.
Up to $50,000 of income can be split between spouses and the maximum benefit of $2,000 (in the form of a non-refundable tax credit) per family.
In order to qualify for the income splitting, there must be a family of two parents and at least one dependent child under the age of 18. The tax credit is for federal taxes only and doesn’t apply to provincial taxes. The tax credit amount doesn’t change based on how many children are in the family.
If you have a family where one spouse earns significantly more income than the other, this tax credit will most benefit you. Using the tax credit is quite complicated for those who do their tax returns manually. Your best bet is to use some of the low cost tax software available to complete the returns since they get automatically updated with tax changes as they occur and will automatically calculate the income splitting tax credit.
The most recent federal budget has announced that this credit will be discontinued starting with the 2016 tax year.
Child Care Expenses
Families are able to claim the costs of childcare that are paid so that they can earn an income, carry on a business or attend school.
In order for the expenses to be eligible, the children must be:
- A child of the taxpayer (or their spouse/common law partner).
- A dependent of the taxpayer.
- Living with the taxpayer when the costs were paid.
- Under the age of 16.
- Adopted children are also eligible.
The child care costs must be incurred within Canada and paid to an eligible provider. Some examples of eligible child care providers are a nursery school, day camp, boarding school or athletic school and costs for a nanny.
The costs paid to a babysitter are also eligible but have a few restrictions. The babysitter can’t be the mother/father of the child or anyone under the age of 18 who is also related to the child. Also, the costs paid to the babysitter (or nanny) will also need to be claimed as income by the babysitter.
There are also rules for students related to child care expenses and they depend on the amount of time the individual is a full-time or part-time student during the year.
Limitations On Expenses
For expenses related to a boarding school the eligible amounts are restricted to:
- $100 per week (non-disabled kids age 7-16).
- $175 per week (non-disabled kids under age 7).
- $250 per week for disabled children.
Maximum Annual Deduction
The child care expenses are limited to 2/3 of your earned income (salary, business income, etc).
The child care expense tax deduction is the lower of:
- Eligible childcare costs.
- 2/3 of the taxpayer’s earned income.
- The following 2015 limits:
- $5,000 per child (non-disabled kids age 7-16).
- $8,000 per child (non-disabled kids under age 7).
- $11,000 for disabled children.
Claiming Child Care Expenses
The child care expenses should be listed under Form T778 (Child Care Expenses). This should be done automatically for anyone who uses tax software to complete their tax returns, and you’ll want to make sure the tax returns for both spouses are linked (again, this should be done automatically within the tax software).
The child care expenses typically must be claimed by the lower income spouse except in certain circumstances (done automatically by most tax software programs).
Registered Education Savings Plan (RESP)
The RESP (Registered Education Savings Plan) is available to Canadians to help pay for a child’s future post-secondary education costs. Any relative is able to open one for a child and there is a lifetime contribution limit of $50,000 (per child).
Contributions are not tax deductible but income earned within the plan is not taxable until the student/beneficiary withdraws the money later to pay for their education. The beneficiary should have low income at the time of withdrawal so hopefully most of the taxes will be covered by the Basic Personal Amount (i.e. not taxed). It's important to note that the original contribution amounts made to an RESP will not ever be taxed because income tax has already been paid on those amounts. Only extra income earned and grant money supplied by the government will be potentially subject to tax.
The federal government contributes money into an RESP using the Canada Education Savings Grant (CESG). This grant works out to 20% of the total RESP contributions made each year. The annual limit is $500 and the lifetime limit is $7,200. This is the real benefit to the program.
The Canada Education Savings Grant (CESG) is available to any resident of Canada who has a valid social insurance number. The grant is available until the end of the calendar year which the child turns 17 years old. The federal government requires that the RESP be created before the child turns 16 and a minimum deposit of $100 annually into the plan for the previous 4 years. If you start an RESP later in your child’s life, there are opportunities to catch up on contributions and still get the bonus CESG contributions, but only one prior year’s contributions amounts can be used in one year.
There is an ‘Additional’ CESG available to lower income families. If the family net income is less than $44,701, then they can earn an additional 20% on the first $500 contributed. If the family net income is between $44,702 and $89,401, they can earn an additional 10% on the first $500 contributed. These income levels are based on 2015 amounts and are updated each year. The additional grant is designed to help lower income families save for post-secondary costs.
How The Taxes Work
The taxes on an RESP depend on whether the child attends post-secondary schooling or not.
If the child goes on to post-secondary, all earnings within the fund are not taxed until they are withdrawn. The withdrawals (used to pay tuition) are called Educational Assistance Payments and the earnings portion of the withdrawals (not the original contributions) are taxable in the year of the withdrawal. Since the student likely has little/no income while attending school, this means they are likely to pay tax at a low marginal tax rate.
If the child does not go on to post-secondary, all earnings (not original contributions) within the fund are taxable to the contributor with an additional tax of 20%. The contributor would then pay taxes at their marginal rate plus an extra 20%. This is designed to discourage people from fraudulently using the program and can result in a high tax bill.
How To Save Money With The RESP
While setting up an RESP for your child, you’ll want to be reasonably sure that he/she will go on to attend post-secondary school. If they don’t go on to post-secondary there could be the potential for a large tax bill.
The program is designed so that earnings within the fund can grow free of taxes (similar to an RRSP). The CESG is free money from the government that can be used to pay tuition costs. There is no annual contribution limit and the lifetime maximum is $50,000 per child. This means a family of 2 children can contribute up to $100,000 total. Although the earnings are taxed upon withdrawal, since the student likely has a low income the tax rate is also likely to be low, or even nothing.
If you’re not reasonably convinced that your child will attend post-secondary schooling, a TFSA may be a better bet for your investments since the earnings are completely tax-free and can be withdrawn at any time, allowing you the flexibility to pay for costs down the road.
Child Fitness Amount
The child fitness tax credit was created in 2007 and allowed parents to claim up to $500 in fitness-related activities for their dependent children under the age of 16. For 2014 and 2015 the amount has been increased to $1,000 per child. In 2016 it will be halved back to $500 and in 2017 it will be completely eliminated.
The tax credit became refundable starting in 2015, which means families of any income can take advantage of it (a non-refundable tax credit would only save taxes for higher income families).
At the beginning of the tax year the child needs to be under the age of 16 (or 18 if they are disabled) in order to be eligible.
The tax credit is calculated using the lowest tax rate (15%) and can mean an extra $150 for families in 2015. The tax credit can be claimed by either spouse. For example, if you paid $400 for your children’s hockey school fees this would result in a tax credit of $60 ($400 x 15%).
In order to be eligible for the credit the child must have been involved in a ‘prescribed program of physical activity’. The program must be:
- Ongoing (at least 8 consecutive weeks or 5 days for children’s camps)
- Suitable for kids and supervised by an adult
- Require physical activity (cardiovascular activities that include strength, endurance, flexibility or balance)
Examples of eligible activities include hockey, soccer, football, golf, ballet, horseback riding and dance.
Example of non-eligible activities include sports academics programs, activities part of a regular school program or activities involving motorized vehicles. Costs that would qualify as child care costs must be claimed as child care costs first, and then claimed via the child fitness tax credit.
Child Arts Amount
Similar to the children’s fitness tax credit, there is also the children’s arts tax credit. This credit is a non-refundable tax credit (15%) on amounts paid for your children to participate in arts programs. The maximum is $500 per child which means you can get up to $75 back per child. Based on the most recent budget, this will be reduced to $250 for 2016 and the entire credit will be eliminated in 2017.
The child must have been under 16 years old at the beginning of the year the expenses were paid (18 years old if they are disabled). Either parent can claim the fees for the child but the amounts can’t be claimed twice and they can’t add up to more than $500 per child when combined.
Examples of arts programs that are eligible for the tax credit include painting classes, art classes, piano lessons, other musical activities and any activity that is designed to improve the coordination and dexterity of the child.
Spouse Or Common-Law Partner Amount
This tax credit is available for anyone who supported their spouse or common-law partner at some point during the tax year. You can only claim this amount if the income of your spouse or common-law partner was less than $11,327 in 2015.
Again, this tax credit is automatically calculated using all tax software programs and is based on your marital status and the income of your spouse or common-law partner. Therefore, it’s important to enter your basic information as accurately as possible when completing a tax return using tax software.
Amount For An Eligible Dependent
This amount is for people who do not have a spouse or common-law partner but have are supporting a person who is living with them. This means a related child under 18 years of age, a parent or grandparent, or a related child with physical or mental impairments.
The amount you can claim for the 2015 tax year is $11,327.
Canadian Child Tax Benefit (CCTB)
If you have children, make sure you have applied for the Canadian Child Tax Benefit. In many provinces this happens automatically when you give birth as long as you fill out the correct forms while you are at the hospital. You can also apply through the CRAs "My Account" or by using form RC66.
The reason this is so important is that there are several child related benefit programs, including provincial ones, that are tied to this. The Universal Child Care Benefit (UCCB) is also linked to the CCTB which was recently increased to give you $160 in taxable income per child under 6 and $60 per child from age 6 through 17.
There are talks of more changes to Canadian childcare benefits soon, so I'm not going to provide all the details of the various programs here, other than to say you need to make sure you have applied for the CCTB and are receiving the related benefits.
Click here for more information on the CCTB.
Tax Savings For Investors
Capital Gains And Losses
Capital gains arise when a capital asset such as a house (other than your primary residence) or shares in a publicly traded company are sold for an amount higher than their original cost. In Canada 50% of capital gains are taxable while the other 50% are not, which makes income from capital gains more attractive than other types of income, like interest.
For example, if you bought shares of a publicly traded company for a total cost of $50,000 and then sold them for $100,000, the capital gain would be $50,000 and half of this ($25,000) would be taxable. The amount of taxes you’d pay depends on your marginal tax rate. In other words, if your income put you in the 32% tax bracket you would pay approximately $8,000 in taxes on the sale instead of $16,000.
The original cost seems straight forward but in some cases can be complicated to determine. For shares the cost is affected by distributions (return of capital) as well as when the shares were purchased. It’s relatively easy to figure out the cost of shares if there was only one purchase, but if there were several purchases of the same class of shares over the year (at different costs) the original cost can be complicated to track. When calculating the capital gain, it’s always important to consider any costs that may have been incurred during the sale. When selling shares the brokerage costs paid can be deducted from the capital gain.
In this case it may be best to hire an accountant if you aren’t sure how to determine the cost of any shares sold during the year (for non-registered investment accounts).
The sale of a principal residence is tax-free but the sale of a rental property for a price above the original cost also is considered as a capital gain. The amount of the gain is reduced by costs related to the sale such as legal fees, home inspection and realtor fees.
Capital losses are losses on capital property and they can be used to reduce capital gains, but can’t be used to reduce other types of income.
A ‘superficial loss’ is a capital loss that isn’t allowed by the CRA and basically involves selling a capital asset (usually shares) for a loss and then buying them back within 30 days after the sale. If you do decide to sell shares to claim a loss, you need to wait at least 30 days to buy them back (if you choose to buy them back).
If you had no capital gains in the current year but you had capital gains in prior years, you can carry back capital losses for the 3 preceding tax years. Capital losses can also be carried forward indefinitely.
This means that if you incur a capital loss in the current year it would get reported and should appear on your Notice of Assessment. Going forward the capital loss can then be used to reduce any capital gains you may have in future years.
Borrowing To Invest
One strategy used by some to increase their wealth is to borrow money to invest. This strategy is typically done to either buy stocks or real estate (rental properties).
The basic strategy is to use money borrowed from the bank to invest in something (like dividend stocks or rental properties) that provide monthly cash flow. The monthly cash flow from the investments is then used to make monthly payments on the amount borrowed.
The tax savings for this strategy is that the interest on the amounts borrowed are deductible for tax purposes.
For example, if you borrowed $100,000 to invest in a handful of dividend stocks that had a yield of 7%, you would earn $7,000 in dividends in one year (assuming you held on to all of them didn’t sell any during the year). If the interest on the loan was 4% you would have paid approximately $4,000 in interest throughout the year. Rather than claiming the $7,000 as dividend income, you would be able to deduct the interest so that you would only need to claim the net of the dividend income and the interest paid.
This strategy isn’t recommended for everyone as it involves a lot of risk – if the value of your investments decrease and you need to sell, you could owe more than what the investments are worth. Also, the investment income may not be enough to make the monthly loan payments so you’d have to set aside money for the loan to be paid back each month.
Interest on money used to make RRSP or TFSA contributions are not deductible for taxes, so this strategy only applies to income that is taxable (as either investment or rental income).
The Smith Manoeuvre
The Smith Manoeuvre is a basic strategy that allows Canadians to deduct the interest on their mortgage. It follows the same principles discussed above (borrowing to invest) except this strategy involves the mortgage on your principal residence (home).
The strategy is simple: you need to obtain a readvanceable mortgage consisting of both your regular mortgage and a HELOC (home equity line of credit).
As you continue to make regular mortgage payments, the HELOC portion increases (while the regular mortgage part decreases) and this money is then used to invest in assets that generate income (usually dividend-paying stocks). As you continue to earn investment income, you use the money to put towards the regular mortgage (non-deductible for taxes) and then invest the corresponding increase in the HELOC (deductible for taxes).
When you complete your tax return, the interest paid on the HELOC is then deducted against the investment income earned.
The large majority of people are better off to focus on their RRSP and TFSA accounts rather than borrow money to invest simply because there is too much risk involved. If you are considering this strategy you’ll want to make sure you have a long term financial plan to pay back the borrowed money.
Dividend Tax Credit
The dividend tax credit is a tax credit given to dividends received by Canadians from Canadian public companies. Generally these types of dividends are considered ‘eligible’ dividends. The tax credit is designed to encourage Canadians to invest in Canadian companies by giving preferential treatment to Canadian dividends. If you have a non-registered investment account and are considering investing in dividend paying companies, you may want to consider focusing on Canadian companies due to the tax break their dividends receive.
To calculate the dividend tax credit you need to gross-up the amount of the actual dividends you received by 138%. Then you would apply your marginal tax rate to the grossed-up amount to determine the taxes owing. The marginal tax rate depends on your level of income and where you live. Finally, you would apply the dividend tax credit – which is 15.02% (federal) for 2015. There’s also the provincial dividend tax credit which varies between the provinces.
For example – if you earned $2,000 in eligible dividend income last year you would multiply this amount by 138% to get $2,760. If you had a marginal tax rate of 35%, this means you’d pay $966 in taxes (before the credit is applied). The federal dividend tax credit is 15.02% and assuming you live in Ontario you’d also get a provincial tax credit of 6.4% - for a total dividend tax credit of 21.42%. Using the grossed-up amount of $2,760, this means you’d get a dividend tax credit of $591.19.
The net taxes you’d pay in this case is $374.81 ($966 – 591.19) - quite the savings. But, before you get too excited, please realize that a portion of this 'tax savings' is to account for the income tax that the corporation itself has to pay. Any money the company pays in taxes, is money not left over to give to shareholders as dividends. However, the amount paid by the company in taxes is generally less than the dividend tax credit for Canadian investors.
It’s important to note that the dividend tax credit doesn’t apply for investment accounts held within an RRSP or TFSA, only non-registered (taxable accounts) are applicable in this case.
Tax Savings For Students
Most people know that you can receive a tax credit for any tuition fees paid (over $100) to a post-secondary institution. Any unused tuition credits can be transferred to a spouse, parent or grandparent (up to $5,000 of credits). They can also be carried forward indefinitely.
Transferring tuition credits to a spouse or parent can result in some significant tax savings for a family. If the spouse or parent (of the student) is in a higher marginal tax rate, it may make sense to transfer the tuition credits to them in order to reduce the taxes payable. On the other hand, if their incomes are low you can also carry them forward indefinitely. Keep in mind that once you get out of school and start earning taxable income, the tuition credits must be used and that point and can’t be carried forward to future years once you start earning income and paying taxes.
Education credits are also available and give the student a credit of $400 per month (full time students) or $120 per month (part-time students).
The more time you attend school, the more you can save. The education amount is calculated using the number of months you attended post-secondary schooling, both full time and part-time. This tax credit gets calculated automatically for you using all tax software programs when you enter the number of months you attended school full time and/or part-time.
This 2016 Canadian Federal Budget indicates that the Education Amount will be eliminated entirely for the 2016 tax year - so take advantage of it now while it is still around.
A textbook tax credit gives students $65 per month (full time students) or $20 per month (part time students).
This tax credit is intended to help with the rising costs of textbooks and is similar to the education amount because it gets calculated automatically within tax software programs using the number of months you attended post-secondary schooling both full time and/or part-time.
This 2016 Canadian Budget indicates that the Education Amount will be eliminated entirely for the 2016 tax year - so take advantage of it now while it is still around.
Student Loan Interest
Students that have taken out an approved student loan are eligible to deduct all interest paid on that loan as a non-refundable tax credit. The student is eligible to claim the amount even if it is paid for by a relative and can carry forward the interest for up to 5 years if they don't have enough income yet to generate taxes to claim it against.
Canada Student Grants
The Canadian government provides tax-free grants to students in all provinces where there isn't a separate provincial grant program already in place for that province. The 2016 Canadian Budget is increasing the amount of these grants as follows starting in the 2016-2017 academic year. For prior years you'll only have access to the lower amounts.
- from $2,000 to $3,000 per year for students from low-income families
- from $800 to $1,200 per year for students from middle-income families
- from $1,200 to $1,800 per year for part-time students.
Since this is free non-taxable money that you never have to pay back, make sure you take advantage of these grants if you are eligible. Click here for all the details on Canada Student Grants.
Tax Savings For Seniors
This is one of the more complicated tax credits available. It’s a non-refundable tax credit of $7,033 (2015) but it slowly gets reduced the more income you earn above and beyond $35,466 (2015). By the time your income reaches $82,353, the credit has been completely clawed back and you will receive no benefit from it.
If you’re using tax software to complete your tax return, this tax credit will be calculated automatically for you based on your age.
The caregiver tax credit applies to anyone who maintained their own dwelling (home) and looked after an aging parent, grandparent or their spouse’s parent/grandparent who is 65 or older. This credit is designed to help people who are looking after a loved one (dependent) who has a relatively low income.
The credit is $4,608 for 2015 but gets reduced when the net income of the dependent is higher than a certain amount ($15,735 in 2015). If their net income is higher than $20,343 the credit is eliminated entirely.
The tax credit is only available if the dependent is a resident of Canada and they must be living with you permanently (not just visiting). The dependent must also be living with you due to a mental or physical impairment.
Pension Income Splitting
Pensioners with a spouse or common-law partner are able to allocate up to half of their pension to their partner for tax purposes. By moving pension income from a higher income spouse to a lower spouse tax savings can potentially be realized by moving that income out of a higher tax bracket. No actual transfer of funds needs to take place between spouses to take advantage of these tax savings. The transfer is only on paper for tax calculation purposes.
Almost everyone can take advantage of pension splitting once they turn 65 because you can convert your RRSP to Registered Retirement Income Fund (RRIF), which qualifies as a pension. So, if you have a larger RRSP than your partner, this is something you should look into.
Please consult the Canada Revenue Agency website for more details on how to split your pension income.
Pension Income Amount
If you receive income from a qualifying pension, then you are eligible for up to a $2,000 non-refundable tax credit (2015) on your federal taxes. There are also corresponding provincial credits as well. That works out to $300 in tax savings per pensioner.
Although traditional pensions obviously qualify, almost anyone over 65 can qualify for this amount by converting a portion of their RRSP to an RRIF and withdrawing a minimum of $2,000 from it as income.
Almost all working Canadians contribute into the Canada Pension Plan (CPP). This pension does not qualify for traditional Pension Income Splitting mentioned above, but you can still split it with your spouse or common-law partner.
You need to explicitly apply to split the CPP so that future CPP payments will be divided accordingly. The tax savings from doing this come from equalizing income between you and your partner so the higher income earner falls into a lower marginal tax bracket.
Click here for information on how to apply for CPP Splitting.
Tax Savings For Those With A Disability
Disability Amount (Disability Tax Credit)
The disability tax credit of $7,899 (2015) is designed to help those who suffer from a severe or prolonged impairment in physical or mental function. All or part of the credit can be transferred to the spouse, common-law partner or supporting person. The most important part of the tax credit is that you must obtain approval from a doctor or certified practitioner in order to become eligible. They will need to verify that you have a severe or prolonged impairment and give details to its effects. The required forms are available on the CRA website and will need to be signed by a doctor, then sent to CRA to verify eligibility.
Amount For Infirm Dependants Age 18 Or Older
This tax credit is for those who have related dependents living with them who are 18 years or older and have an impairment in physical or mental functions. This includes children or grandchildren as well as you or your partner's parent, grandparent, brother, sister, uncle, aunt, nephew, or niece.
The amount is $6,700 for 2015.
The Caregiver Amount mentioned under Tax Savings For Seniors is also applicable to those who are taking care of a person over the age of 18 and who has an impairment in physical or mental functions.
Family Caregiver Amount
This is an additional tax credit of $2,093 (2015) you can add on top of the regular Caregiver Amount, Spouse Or Common-law Partner Amount, or Amount For An Eligible Dependent. This amount is included automatically in the Amount For Infirm Dependents Age 18 Or Older, so if you are claiming that you don't have to worry about this.
The main criteria for claiming this amount is that the person being taken care of has an impairment in physical or mental functions in addition to the criteria for the amount you are combining it with. Get the full details here.
Registered Disability Savings Plan (RDSP)
The Registered Disability Savings Plan (RDSP) is a program created in 2009 by the federal government that provides savings for parents of children who are eligible for the disability tax credit.
More On This: Read Our Full Article On The RDSP
The money within the plan is allowed to grow tax-free similar to an RRSP and is only taxable when it is withdrawn from the plan.
There are specific criteria used to determine eligibility for the RDSP:
- You need to be eligible for the disability tax credit.
- You need a valid social insurance number (even for children).
- You need to be a resident of Canada at the time the plan is created.
- You must be under the age of 60.
The lifetime contribution maximum is $200,000 with no annual limit, so your contribution amounts can vary from year to year with no penalty (as long as the total is below $200,000). The contributions are not tax-deductible.
Contributions can be made at any point until the end of the year when the plan beneficiary turns 59. At that point no more contributions can be made.
Plan transfers can be made as long as the beneficiary is the same for both plans, all funds are transferred (no partial transfers are allowed) and the original account is closed when the funds are transferred to the new account.
Canada Disability Savings Grant (CDSG)
The Canada Disability Savings Grant (CDSG) is a grant given by the federal government that allows the funds to grow even faster. The amount of the grant depends on the amounts you contribute as well as family income. The grant pays a certain percentage of your total contributions and ranges from 10-300%. The lower your family income, the higher the percentage you can receive.
Family income is determined using the beneficiary’s income while they are a child. When they turn 18, the spousal income is also added to the family income. The annual maximum grant is $3,500 and the lifetime maximum is $70,000.
For those with a family income of less than $89,401, they will earn:
- $3 for every $1 contributed for the first $500 (maximum $1,500 per year).
- $2 for every $1 contributed for the next $1,000 (maximum $2,000 per year).
For those with a family income of more than $89,401, they will earn:
- $1 for every $1 contributed (maximum $1,000 per year).
Canada Disability Savings Bond (CDSB)
The Canada Disability Savings Bond (CDSB) is another grant from the federal government available to assist Canadian families.
The lifetime maximum is $20,000 ($1,000 annually) and the amount received is based on family income – no contributions need to be made to receive the CDSB.
The CDSB is less common as it is geared towards lower income families; families with an annual income of $26,021 or less (2015) would receive the annual maximum of $1,000 while families with an annual income of more than $44,701 (2015) would not be eligible to receive the CDSB.
Clawback Of Government Funding
In certain situations the funding received by the federal government (either through the CDSB or CDSG) may need to be repaid.
The following situations may mean the funds will need to be paid back:
- If the plan is deregistered or terminated.
- If the beneficiary is no longer able to receive the disability tax credit.
- If the beneficiary passes away.
More Help For Those With A Disability
The CRA website has an entire guide dedicated to tax related deductions for those with a disability. I've mentioned the most prominent ones above, but please refer to their guide to make sure you don't miss anything.
Other Specialized Tax Savings
Union And Professional Dues
If you are part of a union or have a professional certification that you are required to maintain by law that is not paid for by your employer, then you are able to claim the amount of these dues for a tax deduction.
Volunteer Firefighters’ Amount
Anyone who performs up to 200 hours of volunteer firefighting services in one year is eligible for a credit of $3,000. The type of volunteer work that is eligible includes being on call for emergencies, attending meetings and participated in required firefighter training. Certification from a fire chief is required in order to be eligible for the credit.
If you have adopted a child who is under the age of 18, you can claim a tax credit for up to $15,255 in expenses (2015) you incurred as part of the adoption process. Here is a list of eligible expenses.
Fixing Errors On A Tax Return
If you have already completed your tax return and recently discovered you made an error in filing, the process to fix the error is fairly straight forward.
To make a change to a return that has already been filed (including prior years) you need to fill out a form called a T1-ADJ which is available on the CRA website by clicking here. You will need details on what exactly needs to be changed, the line number(s), the amounts before and after the requested change and the reasoning for the change.
It’s important to note that if a mistake has been made on a return that has already been filed you should complete a T1-ADJ rather than simply filing another tax return.
This article was originally written by Dan, one of our writers who is an accountant, but has since been updated by Stephen in April 2016 - for the 2015 tax year. Stephen is not an accountant and it is possible that there are errors or omissions on this page. Please contact a certified account before making major financial or tax related decisions and refer to the Canada Revenue Agency website for the most up to date tax information.