Let’s face it: everyone wants to find easy ways to save their hard-earned money. Some clip coupons and shop online for discounts and deals, some invest in long-term savings, and others simply drop their spare change in a piggy bank every day. But is it really possible to save money when it comes to taxes? It seems the Canada Revenue Agency makes you pay tax on everything, but there are some ways to reduce what you owe the taxman.
It might seem like free money when you receive a tax refund cheque in the mail, but the reality is it is your money. A tax refund is money you overpaid the government last year. Some people call this ‘intaxication’ – the excitement you feel when you get your tax refund, only to realize that it was your money in the first place.
Thinking about your taxes in March is too late. You cannot do anything that will impact your return by then. Tax planning should be a year-round activity. If you have a financial plan already in place, Cleo Hamel, senior tax analyst for H&R Block Canada, suggests making tax planning a part of it. “Ideally, you want to neither owe money nor receive a refund when you file your tax return,” says Hamel. “You want to pay the right amount of tax during the year, rather than give the government an interest-free loan.”
Pay attention to your pay and where life takes you
If you are a salaried employee, your payroll department will ask you to complete a TD1 Form when you are hired. Employers are obligated to withhold tax based on how you complete your TD1 Form. In most cases, people fill out the form and forget about it. But if your life changes, updating your form to reflect the new situation is a good idea.
Are you a newlywed? If you get married while still working for the same employer, you should update your TD1 Form if your spouse has little to no income. For example, if your spouse earned no income in 2013, the spousal amount would result in $1,655 of tax savings. So updating your TD1 means an extra $137 per month, rather than the lump sum at tax time.
What about a new addition to the family? If you have a child you can claim the child amount, which is about $27 per month in tax savings. And if you are a single parent with custody, you can claim the eligible dependant amount. It may not result in a huge increase in your pay cheque but it is better than giving the government an interest-free loan.
Manage your investments
If you are a regular contributor to your RRSP, you can also ask for your tax withholdings to be reduced. Unfortunately, this cannot be done via a TD1 Form but through a special request to the CRA.
“It is the employee’s responsibility to complete his or her own T1213 Form Request to Reduce Tax Deductions at Source, provide supporting documentation and send it to the CRA for approval,” says Hamel. “And remember, the CRA will require proof that you are making your RRSP contributions so be sure to keep clear records of all of your investments – big and small.”
Life events = tax events
Inheritances are not taxable, for example, but if you earn income from the money you receive then that income is taxable. And if you inherit a house when you already own one, you may be facing capital gains on the eventual sale of the home. For tax purposes, the CRA calculates gains as if the deceased sold all their assets on the day they died.
If you have a stock or share that has been good to you during the year and you cashed in some of your holdings, you will need to report the capital gain. However, you may be able to claim this against capital losses you are carrying forward. And bonuses or gifts from work may be considered a taxable benefit and appear on your T4, so you will need to pay tax on these amounts.
Life events—both good and bad—can change your tax situation and being aware of that will likely save you both money and headaches.
More on Tax Issues
Hamel suggests preparing for the annual tax deadline well in advance to ensure all the necessary forms and paper work are in order and you save the most money possible. And be sure to use a reliable source when it comes to filing. If you are a DIYer and prefer to manage it all on your own, use tax preparation software, like H&R Block Tax Software, which guides you thorough step-by-step tips to identify every possible deduction or credit, calculates your return as you go, and ensures you get your maximum refund. Until March 31, you can file one return for free using H&R Block Tax Software.
If you aren’t comfortable doing your own taxes, visit an H&R Block office where a team of tax professionals is available to help year round.
At Financial Highway we are always looking for well written guest posts to mix things up a little. Are you interested in submitting a guest post to Financial Highway? Here are guest post submission guidelines.