It’s tax season, so it’s time to gather that pile of documents from employers, banks, administrators and others. You need to check their accuracy and hand them off to your tax advisor.
Accuracy is critical, as errors on these slips of information can affect your tax liability. Here are details on what to expect and look for.
Generally, your accountant has until midnight April 30, 2017, to file your 2016 income tax return.
What’s the Difference between a Deduction and a Credit?
Deductions are taken off your gross, taxable income and are generated by various expenses you incur. Because they reduce your taxable income on your federal tax return, they can lower your marginal tax rate.
Tax credits are subtracted directly from the amount of tax you owe to the federal or provincial governments. They generally aren’t dependent on your tax bracket and come in two varieties:
1. Nonrefundable tax credits. If, when you claim these, you lower your tax payable to $0, you don’t receive a refund for any balance of the credit.
2. Refundable tax credits. Amounts are refunded to you if your tax payable reaches $0.
The value of tax credits depends on what they are for. Some are granted for specific situations or under certain classifications.
Pay Close Attention to Deductions
Many deductions are overlooked. Be sure you don’t forget to give your accountant documents and receipts related to these common deductions:
Health. Premiums for medical coverage, including private insurance and amounts taken for employer plans, can all be deducted.
Registered Retirement Savings Plan (RRSP). Contributions can be deducted from taxable income. The maximum limit you may deduct for the current tax year is 18% of your income for the previous year, or $25,370 for 2016. You may contribute more if you didn’t use your entire RRSP deduction limit for previous years and you can carry forward unused contributions for life.
Childcare. Working parents can claim childcare costs for babysitters or nannies. You can claim payments made to:
- Caregivers providing child care services,
- Day nursery schools and daycare centres,
- Educational institutions, for the part of the fees that relate to child care services,
- Day camps and day sports schools where the primary goal of the camp is to care for children (an institution offering a sports study program isn’t a sports school), or
- Boarding schools, overnight sports schools, or camps where lodging is involved.
Self-employment. You can deduct expenses for the part of your home you use for business. If you own your home, you can claim part of your mortgage interest and property taxes. If you rent, deduct part of your monthly rent. You can also deduct the cost of:
- Maintenance expenses for the percentage of your living space used for business,
- Supplies, and
- Client entertainment
Interest and carrying charges. Mortgage interest isn’t deductible, but several expenses related to financing or investment may be deducted, including, among others:
- Interest on loans for investments or to purchase income-producing assets, and
- Interest on the purchase of Canada Savings Bonds through a payroll deduction plan.
- Fees paid to accountants to prepare and file your tax and benefit returns, certain legal fees and certain expenses that go to managers of your investments can also be deducted in certain circumstances.
Moving costs. You can claim eligible expenses if you moved and established a new home to work or run a business or if you moved to be a full-time student in a post-secondary program at a university, college or other educational institution. To qualify, your new home must be at least 40 kilometers (by the shortest usual public route) closer to your new work or school. Eligible expenses include moving costs, travel, accommodations, temporary living arrangements and the costs involved in selling your previous residence.
Union or professional dues. If you belong to a union or professional organization, you may deduct all amounts you paid related to your employment, including union dues, professional membership fees or premiums for professional liability insurance.
Tax Credits Add Up
Be sure your accountant is aware of any tax credits that may apply to you. Your eligibility can change on an annual basis. Here are some of the more common tax credit areas:
Disability. You can claim substantial credits provided you expect the disability to last at least 12 months. The disability tax credit is a nonrefundable credit for disabled persons or their supporting persons. Individuals may claim the $8,001 disability amount once they’re eligible for the credit. If they qualify for the disability amount and were under 18 years of age at the end of 2016, they may claim up to an additional $4,667.
If you missed taking the disability amount in the past, you can amend filed tax returns. If you don’t need to use some or all of the tax credit because you have little or no income, you may be able to transfer all or part of it to your spouse, common-law partner or other supporting person.
Medical benefits. If you paid for hospital services, paid to live in a nursing home, or bought medical supplies such as pacemakers, vaccines or walking aids, you may be able to claim a nonrefundable tax credit. Married taxpayers can maximize the medical credit by pooling nonreimbursed, eligible expenses on the tax return of the lower-earning spouse or common-law partner. Claim expenses for any consecutive 12-month period that ends in the year of the tax return. Your accountant can help you choose the best period to maximize the benefit of this credit.
Most provinces and territories also offer nonrefundable medical tax credits. When an insurance plan reimburses expenses, only those not covered by the plan can be claimed.
The list of medical expenses eligible for the credit is extensive and includes costs incurred outside Canada. Your tax specialist will know them all.
The following are some of the expenses you can’t claim as medical expenses:
- Athletic or fitness club fees,
- The cost of blood pressure monitors,
- The cost of organic food, and
- The cost of over-the-counter medications and supplements, even if they were prescribed by a medical practitioner
Equivalent-to-spouse. An individual may claim, under certain circumstances, the “amount for an eligible dependant” non-refundable tax credit for a dependent child or other dependent relative. The $11,474 credit for 2016 is reduced by income earned by the dependant and can be claimed by only one person. It can’t be claimed:
- If you claim the spousal amount tax credit, or
- The claim is for a child for whom you were required to make support payments during the year. If you and your spouse were separated for part of the year due to a breakdown in your relationship, you can still claim the credit, as long as you don’t claim any support amounts paid to your spouse, and as long as the child was under 18 years of age or mentally or physically impaired during the separation.
Charitable donations. There’s a credit for charitable donations that increases the more you give. In any one year, you may claim:
- Donations made by December 31, 2016,
- 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.
You can claim eligible amounts of gifts to a limit of 75% of your net income. For gifts of certified cultural property or ecologically sensitive land, you may be able to claim up to 100% of your net income.
More about Credits
Education. Many people miss the chance to transfer credits when their children attend college or university. Make sure students file their own tax returns. If they don’t need all their tuition or education credits, they can transfer them to parents, grandparents, a spouse or common-law partner.
Pensions. If you receive eligible pension, superannuation or annuity payments you may claim a credit of as much as $2,000. The credit is nonrefundable and may not be carried forward. Canada Pension Plan (CPP), Old Age Security (OAS) or Guaranteed Income Supplements (GIS) aren’t eligible for the credit, but you can transfer it to your spouse or common-law partner.
Your accountant will help ensure that you get the most out of your available tax breaks, as long as you provide the necessary information and documents.