April 30 is the deadline for Canadians to file their 2010 tax return. Since this year April 30 falls on a weekend, the actual deadline will be the next business day, May 2.
Here are some helpful tax strategies to consider when filing your personal tax return this year.
1) Consider filing a tax return for your child -- Most of the time children's income will fall below the basic exemption so they will not owe any income tax. Due to this fact, many parents will opt not to file a tax return for junior. However, if they have earned any income during 2010, filing a return can have some advantages. For example, income claimed will create RRSP room for future use.
Also, if they had part-time employment, filing a return may allow them to receive any over contributions of CPP and or EI premiums. If the child is over the age of 18, filing a return will establish Tax Free Savings Account (TFSA) room, that can be used now, or be carried forward for future use.
2) Split Income with your spouse -- If you received pension income that is eligible for the pension income tax credit, you can allocate up to one-half of that income to your spouse or common-law partner's tax return. Pension splitting is still a fairly new concept and when eligible, can be a very powerful tool in reducing your overall income tax burden. The source of pension income will determine if it qualifies or not.
For example, income from a company's pension plan can be split at any age, however, income from a RRIF, or LIF can only be split only if you are over 65 years old. Old Age Security (OAS) and Canada Pension Plan (CPP) are generally not eligible (although application can be made to HRSDC to have the income split). When the person earning the pension income allocates some of their income to the spouse in the lower tax bracket, a lower total amount of income tax is paid. Work with a tax professional to determine what the most beneficial allocation of income should be and if this strategy makes sense in your situation.
3) Strategically use your charitable donation receipts -- the first $200 of charitable donations attracts a federal tax credit of 15% while anything over $200 receives a federal credit of 29%.
The provincial credit is then applied and that amount varies from province to province. It is tax smart to either combine the receipts for multiple years, or between spouses to maximize the tax credit. Also consider donating mutual funds units or securities that have increased in value to charity as you will avoid having to pay the capital gains normally attributable and get more bang for your buck.
4) Take Advantage of Capital Losses -- make sure that if you sold any investments in 2010 that triggered a loss, that you report it on this year's tax return. Capital losses can only be used to offset capital gains, but if your losses exceed your gains, you can carry them back the last three years to recapture capital gains paid in those years. If any of the losses were not able to be applied during those years, they can be carried forward indefinitely.
5) Allocate Dividend Income between spouses -- Although investment income is generally attributed to the spouse who owns the investment, dividend income is treated differently. In the case, where one spouse earns the majority of the income, actually having the higher income spouse claim both of the couple's dividend income (which due to the dividend tax credit has favourable tax treatment) may work out to be tax advantageous. The higher income earner receives tax friendly income and has a higher spousal claim that can off-set the lower tax paid on the dividends. This strategy is often called "Reverse Income Splitting."
6) Do not leave deductions on the table -- Especially if you are self-employed or are a commission salesperson, work with your accountant to make sure you are receiving the full benefit of any deductions for which you may be eligible.
Calculate your travel, meal and entertainment expenses. Consider not only direct automobile expenses and leasing costs, but capital costs allowances and loan interest if applicable. Review home office expenses, leasing of equipment, insurance premiums and training expenses to name a few.
It should go without saying that any tax strategy or deduction should be discussed with a tax professional to ensure that you are not offside of Revenue Canada's guidelines. As Canadians, we have an obligation to pay taxes, but we also have the right to not have to pay more than our fair share.
This information is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. Please speak to your own advisors concerning your personal situation.
