This article is to highlight areas when you assess tax situations for 2016. We hope those tips can help you maximize the tax saving for the year.
Maximize the deductions
Make sure you utilize all the available tax-deferred plans. We always talk about RRSP but don’t forget about TFSA, which allows you to contribute up to $5,500 to a TFSA for 2016, as long as you are 18 or older and resident in Canada. Watch out on this as the limit decreases from the $10,000 TFSA limit that was available in 2015.
Sale of a Principal Residence
In 2016, the federal government has announced a critical change to the reporting of the disposition of your principal residence. Before, if the gain on a principal residence was entirely exempted, the disposition in their tax return was NOT required to be reported in your tax return. However, starting from 2017 calendar year, for sales occurring in 2016 and future tax years, taxpayers need to report the transaction on form T2091 to be considered eligible for the exemption. If there is a change in use of the principal residence during 2016, a deemed disposition is required to be reported in the tax return as well.
Investment income
If you own investments outside of non-registered plans, then you should read through the followings:
Each type of investment income has different tax implication. Generally, interest income is fully taxed based on accrual basis while dividend taxed at gross-up amount with a dividend tax credit. Capital gain has favorable tax treatment as it is taxed when realized and only 50% of the realized gain is taxable. At the time when looking at your investment income reported in the tax return, you may consider the following questions:
- It is time to revisit the investment mix to achieve better return based on the economy forecast, should it be more aggressive or conservative?
- Whether the effective investment return meets your expectation; some clients paying big bucks for asset management for a small portfolio, after tax and management fee, the return is about 2%, not bad, Just a bit better than some indexed GICs. Does it make sense to hire portfolio managers to run such a portfolio with a big price tag? I think you have the answer right away.
- Whether the interest borrowed for investment is deductible or interest deduction is maximized.
- Whether tax-deferred plans like RRSP/TFSA are fully utilized.
New Canada child benefit
The Child Benefit is based on family net income in the preceding year. First of all, you and your spouse or common law partner have to file your tax returns for 2015. Then, the CRA can base on 2015 number to determine whether you qualify for the benefit for the July 2016 to July 2017 period. In order to continue receiving the new Canada child benefit, you must file your income tax returns every year. Secondly, the basis to determine this benefit is family net income. If both of you and your spouse are in high income, make sure maximize all the deductions available such as RRSP deduction, which brings family net income to lower level so that you are eligible for more benefit.
Charitable donation tax credit
Donations made to registered charities, registered Canadian amateur athletic associations, Canadian municipalities, the federal government or a provincial government are eligible for a tax credit. According to the CRA, in any one year, you may claim: donations made by December 31 of the applicable tax year; any unclaimed donations made in the previous five years; and any unclaimed donations made by your spouse or common law partner in the year or in the previous five years. And remember any eligible amount you give above $200 qualifies you for a higher rate. Here is the tip: if you/your spouse accumulate less than $200 for the current year, it may be better off carrying over to the following year once the donation is over $200.
Here is an example:
Isabelle lives in the province of Ontario and donated $400 in 2016 to registered charities:
The federal charitable tax credit rate is 15% on the first $200 and 29% on the remaining $200. Her federal tax credit is therefore (15% × $200) + (29% × 200) = $88.
The provincial charitable tax credit rates for Ontario for 2016 are 11% on the first $200 and 15% on the remaining $200. Therefore, her provincial tax credit is (11% × $200) + (15% × $200) = $52.
Her combined charitable tax credit is ($88 + $52) = $140
Medical expenses tax credit
Payments to medical practitioners, dentists or nurses, or to public or licensed private hospitals in respect of medical or dental services can be claimed as medical expenses. They can be paid for yourself, your spouse or common-law partner or your dependents. Generally, total eligible medical expenses are first being reduced by 3% of your/ your spouse net income or $2,237, whichever is less. Therefore, it is optimized to claim medical expense on the spouse who has lower net income. Other than that, you can select your 12-month period to maximize the tax credit. The 12-month period ending in the year may vary from year to year as long as the same expense is not claimed twice. Keep your receipts for next year if some of your 2016 expenses are not claimed as a credit in 2017.
Children’s fitness and arts tax credits
Effective for the 2016 taxation year, the maximum eligible amount per child will be REDUCED to $500 from $1,000 for the children’s fitness tax credit (which will remain refundable for 2016) and to $250 from $500 for the children’s arts tax credit. The supplemental amounts for children eligible for the disability tax credit will remain at $500 for both credits for 2016. Therefore, the maximum credit is reduced to $75 respectively. Remember, this is the last year to receive this credit. Effective for the 2017 and subsequent taxation years, both credits will be eliminated. Also, remember, the year in which the tax credit can be claimed is determined by THE DATE when the fees are paid, not when the activity takes place, make sure you can max out the benefit that you are entitled to.
Bring questions to your accountant
If you have complex or significant financial situations, make sure you consult with accountants for tax implications before the transactions occurs. One thing that I strongly suggest is to bring all the key documents and make an appointment before the busy time so that your accountant can easily look through the key facts and pinpoint the potential tax issues. Accountants always like to plan things ahead to avoid any surprise later on. Transactions like business compensation mix, rental property, purchase/sale of business/property are complex and tax treatments vary based on situations. Bring questions to your accountants and get a clear answer. Remember, this is an excellent opportunity for you to maximize your income tax planning opportunity, assuming you are only seeing them once a year.
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