- Sean Marek, CPA CA
Top 8 (Legal) Ways to Reduce Your Taxes
New Credits for 2015
The children’s fitness tax credit is increasing from $500 per child to $1,000 per child
The child care expense deduction limit will increase by $1,000 to $8,000 per child under age 7, and $5,000 per child aged 7-16.
The Universal Child Care Benefit (UCCB) will increase from $100 per month per child under 6 to $160, and will now include a new benefit of $60 per month for children aged 6-17.
Family Income Splitting
Beginning in 2014, couples with children under 18 are able to transfer up to $50,000 of income to the lower income spouse, with up to $2,000 in federal tax savings.
Tax reduction strategies
1. Contribute to RRSPs
RRSPs are a great tax deduction because they reduce your taxable income dollar for dollar by the amount contributed.
RRSP room is based on 18% of net income (to a max of $138,500 of income or $24,930 of contribution room), and the room carries forward forever. So, it is important for teens and young adults to start filing tax returns as soon as they start earning income to generate contribution room for later.
Spouses can contribute to spousal RRSPs to help shelter tax: the higher income spouse gets the deduction now for contributing, and the lower income spouse eventually takes the amount into income in retirement.
2. Deduct your vehicle
If you use your vehicle for business, you can deduct a portion on your tax return. If you are self-employed, no form is required. If you are an employee using your vehicle for work, you need a signed T2200 from your employer to deduct these expenses.
You can deduct expenses including: fuel, maintenance, insurance, driver license, loan interest, car washes, CAA membership, leasing costs, or capital costs.
Note that driving from home to your place of business and back is not considered business use. However, driving from home to meet with clients (not at your principal place of business) is considered business use.
It’s important to keep a log of your business kilometers to support your business use claim.
There are limits to what you can claim: the maximum purchase price that can be deducted is $30,000 plus tax. The remainder is never deducted. Likewise, if you lease a vehicle worth more than $30,000 plus tax, a portion of your lease payment will not be deductible.
3. Use a home office
This is not as good a deduction as people think, but can be helpful if you qualify. In order to qualify, you must meet of the following criteria:
Your home is your principal place of business (ex. Writer, designer, computer consultant)
The space is used exclusively for earning income AND used on a regular and continuous basis to meet clients or customers.
If you have a main office somewhere else, you generally cannot also claim a home office. If you’re an employee, you need a T2200 signed by your employer stating that you require a home office to perform your job.
Employees can deduct:
Commissioned employees can deduct the above, plus:
Self-employed individuals can deduct all of the above, as well as:
You can only deduct the portion of these expenses related to your office space. For example, if your office is 10 x 10 or 100 square feet, and your home is 1000 square feet, you can deduct 10% of the allowed expenses.
4. Save your medical receipts
Your out-of-pocket medical expenses need to meet a threshold of either 3% of your net income or $2,152, whichever is lower to be deductible. Only the portion above that threshold is deductible.
Some examples of medical expenses you can claim include:
Premiums paid for a healthcare plan (Blue Cross, etc.)
Massage (only in some provinces – here is a link to which health practitioners’ expenses can be claimed by province: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/ampp-eng.html)
If you are self-employed or incorporated, consider a cost-plus plan, such as Olympia Benefits (www.olympiabenefits.com). Your business can then deduct 100% of your personal medical expenses, so you don’t need to hit the 3% threshold before tax savings start.
5. Give to Charity
Donations can be carried forward for up to 5 years, so it can be advantageous to hang on to your receipts and make claims every few years:
Try to exceed $200 in total giving when you make your claim, as the credit is higher: you get the tax credit at the top tax rate (46.4% in Manitoba) even if you are not in the top tax bracket
If you have stocks outside your RRSP that have increased in value, you are better off donating them instead of cash – the capital gain is not taxed AND you get the charitable tax credit!
6. Make your interest deductible
Interest on money borrowed to earn investment or property income is deductible.
For example, if you borrow money to buy a rental property or non-RRSP stocks, the interest is deductible.
Make sure you keep statements or other documentation to back up your claim, as CRA often asks to see it.
Pay cash for your personal purchases, borrow for your investment/business purchases.
Pay down your own home mortgage faster than your rental property.
7. Deduct Childcare
In order to deduct childcare, it must be an expense incurred so you or your spouse can earn employment income.
Day care, nannies, or day camps are good examples of deductible expenses.
Childcare must be claimed by the lower income spouse, but it is a direct deduction from income rather than a tax credit.
2014 limits are $7,000 per child under age 7 and $4,000 for children over 7 (each of these limits are set to increase by $1,000 for 2015)
8. Incorporate your business
If you are operating a self-employed business, consider becoming incorporated
Liability is limited to the corporation, protecting your personal assets (for example, if a customer were to sue your business)
Corporate tax in Manitoba is only 11% compared with a top personal tax rate of 46%, but that is only for profits left in the company. If you don’t need all the profits of your business to live off of, incorporation can be a good way to defer tax.
It is possible to income split with lower income spouses, children, or parents