It's too late to do much to reduce the income tax you owe Canada Revenue Agency (CRA) for the 2010 tax year. However, conducting a post-mortem on the tax return you just filed could be very profitable. A few minutes of work is likely to uncover some opportunities to reduce the income tax you'll pay for the 2011 tax year.
Many taxpayers will be able to complete this review on their own. If your financial affairs are complex, or you want a fuller understanding of the tax-planning options applicable to your personal situation, consult an experienced tax accountant.
Begin your post-mortem by pulling out your completed 2010 tax return. You will also need the CRA Notice of Assessment for the 2010 tax year. This document explains the results of CRA's assessment of your tax return and any changes it has made. The assessment notice usually arrives in the mail a few weeks after you file your return. You'll be able to access your tax documents online if you have signed up for CRA's My Account.
Tax-reduction opportunities exist in four main areas.
1. Reducing income tax deducted at source
If you received a big tax refund for the 2010 tax year, you may be able to reduce the tax deducted from your pay and avoid giving CRA an interest-free loan until tax time next year. It's as simple as reviewing and updating the Personal Tax Credits Return your employer has on file. The information on this form determines the amount that is withheld from your pay and remitted to CRA.
2. Maximizing the value of allowable deductionsMaking your RRSP contribution at the beginning of every tax year maximizes the tax-saving value of your RRSP deduction (line 208 of your tax return). You will find your
RRSP deduction limit for 2011 listed on your 2010 CRA Notice of Assessment. If your budget won't allow a large one-time contribution, set up the automatic transfer of a portion of every paycheque into your RRSP account. Most banks offer this service.
If you pay someone to look after your child so you can earn income, go to school or conduct research, you can usually claim at least some of these child-care expenses on line 214 of your tax return. If you plan to use this deduction for the first time in 2011, read the relevant CRA information sheet now to familiarize yourself with the requirements. Note that you will need a receipt from your child-care provider detailing the services provided.
A surprisingly wide range of moving expenses can be deducted on line 219 of your tax return, if you plan to move in 2011 to work or pursue full-time post-secondary education. You may even be able to claim moving expenses not filed in 2010. As with most tax deductions, there are lots of rules, so take the time before you move to read CRA's Information about Moving Expenses. Keeping receipts is a must.
3. Structuring your investment income to attract a lower tax rate or no tax
In the eyes of the taxman, not all income is created equal. Interest income and dividends from foreign corporations (line 121) attract the highest tax rate. Income from capital gains (line 127) is taxed at half that rate. Eligible Canadian dividends (line 120) are usually taxed at less than half the rate you pay on interest income. That rate could even be negative, depending on your tax bracket and the province where you live! Take a few minutes to check out the income-tax rates that apply to you. The website Taxtips.ca has a useful summary by province.
Given tax rates that differ wildly by income type, your post-mortem should go hand in hand with the annual review of your financial plan. Consider how you might structure your taxable investments to generate more capital gains and eligible Canadian dividends, and less fully taxable income. For example, you could put a portion of your fixed-income allocation in investment-grade Canadian preferred shares instead of interest-bearing GICs or bonds. And don't forget to make your annual $5,000 contribution to your Tax Free Savings Account. The TFSA is a rare opportunity to avoid paying tax.
4. Arranging your affairs to optimize tax credits
The federal government offers a smorgasbord of non-refundable tax credits designed to achieve public-policy objectives as diverse as promoting children's fitness, helping students with education costs and encouraging the use of public transit. If your personal situation has changed recently, a scan of the credits listed in Schedule 1 of your tax return could uncover credits for which you now qualify. For example, those buying a new home in 2011 might be eligible for the $5,000 home buyer's amount (line 369). If you identify a credit that might apply to you, consult CRA's website to find out how to qualify.
Provincial governments have their own set of tax credits. Some of them parallel federal tax credits. Others, such as Ontario's Senior Homeowner's Property Tax Grant or British Columbia's Low Income Climate Action Tax Credit, are unique to a province. A quick read of the tax credits listed in your provincial tax return could bring to light more credits that apply to you. Don't forget to brush up on the particulars of a potential tax credit. The website of your provincial government's revenue or finance department should have all the details.
Reviewing your tax return and CRA Notice of Assessment and considering the tax implications of your present personal circumstances should be an annual ritual. A few minutes of drudgery now will usually pay off when you file your tax return next year. You may even discover enough tax savings to afford those guilty pleasures that are currently beyond your budget.