Common tax deductions and credits for individuals

As tax season is in full swing, let’s take a look at the most common tax deductions and credits in Canada for individuals

A tax deduction offsets your taxable income, whereas a tax credit offsets your tax payable.

Tax credits are either refundable or non-refundable. A refundable tax credit will both decrease your tax payable and trigger a refund if applicable.

A non-refundable tax credit will only decrease your tax payable.

Tax deductions:

  • RRSP contributions: the most famous and used tax deduction. Any amount you contribute to a registered plan lowers your taxable income. If you earned $ 50 000 and contributed $ 5 000 to your RRSP, your taxable income is $ 45 000.
  • Daycare expenses: you can claim up to $ 8 000/year for children under 7 and $ 5 000/year for children up to 16.
  • Moving expenses: to claim this deduction, you need to have moved at least 40 kms away.
  • Union or professional dues
  • Support payments to children and/or former spouse
  • Carrying charges such as deposit box rental and fees paid to Financial advisors
  • Split-pension amount

Tax credits:

  • Spouse or common-law partner amount: if your spouse/partner is not working and you are supporting her/him.
  • Amount for eligible dependent: for single people supporting their children or other blood-relatives.
  • Adoption expenses
  • Caregiver amount: if you are supporting a parent with a disability
  • Caregiver amount for children:if you are supporting a child under 18 with a disability
  • Interest paid on federal and provincial student loans
  • Tuition fees and textbooks
  • Medical expenses: need to be a minimum of $ 2 208 for 2015
  • Donations to registered charities and political parties
  • Public transit amount: for monthly passes only
  • Children’s fitness and art credits: up to $ 500/children
  • First-time home-buyer amount: $ 750

There are many more credits, depending on your personal situation as well as your province of residence.

For example, in British-Columbia, you can claim additional credits if you are a coach, an apprentice or if you work in mining or logging.

In order to obtain the deductions and credits, you need to report them on your tax return. If you don’t, you won’t get them. Each year, thousands of tax dollars remain with the government because people are not aware of the deductions and credits they can claim. Educate yourself!

And remember, a tax refund is not windfall money. It is an interest-free loan to the government!

After filing your tax return

Most Canadians don’t really give much thought about what happens once they have filled their taxes with C.R.A. Besides issuing refunds or collecting owed amounts, there are a few steps in between that could impact you.

Pre-assessment review: right after you file, the deductions and credits you claim are reviewed to issue your Notice of Assessment and refund (if applicable). This happens from February to July and is a basic review.

Processing review program: similar to the pre-assessment review, except it takes place from August to December.

Matching program: This is a thorough review of your return. C.R.A. will compare what you filled with the information provided to them by your employer, banks, investment companies or charities. It usually happens between October and March. It may trigger a Notice of Reassessment and adjustments could be made to your RRSP limit or any benefit you are eligible for. It may also change the amount you owe or are owed.

For these 3 steps, it is unlikely C.R.A. will contact you.

Special assessment program, a.k.a. audit: This process can happen at any time, even for past returns. C.R.A. will send you a letter requiring additional documents or information.

If you are contacted, do not ignore the request. If you do, the agency will adjust your return based on their findings, and it won’t be in your favour. You may elect to consult a tax lawyer or an accountant.

There a few common reasons why you are audited:

  • Random selection
  • Discrepancies found during the matching program
  • Past history and reviews

Tax payers are required to keep all returns, records and documents for 6 years.

The agency is aiming for efficiency. Usually audits target a specific group of people or industries, but sometimes it is just “your turn”.

In a nutshell, reviews are very common. My 2011 return was reviewed. I had to reimburse $ 20.00 for an error in the calculation of my CPP amount. The Agency did not contact me prior to issuing a Notice of Reassessment.

 

Large tax refunds aren’t that great

Image result for tax refund canada

Every year, at the same period, it is the great race to the tax refund. Everybody hopes for and wants one; the bigger, the better.

Getting a massive tax refund is actually not that great. Simply put, it means you are over-paying on your taxes. In Canada, income tax is taken at the source i.e. from your salary, if you are an employee; and from installments if you are self-employed.

The money is remitted to the Federal Government. When you file your tax return, you either owe additional income tax or you receive a refund. Sometimes, you are at “zero”, meaning you don’t owe money nor are entitled to a refund.

A lot of people see a tax refund as being a windfall or new money. But, as indicated in its name, a refund is a repayment or a reimbursement made to a person for over-invoicing or for returned goods. It is definitely not new money; it is your hard-earned money that has been hoarded by the Federal Government.

The icing on the cake is that you don’t receive any interest on your refund. On the other hand, if you are one day late in filing your return or paying your taxes, you are immediately assessed with interests and penalties.

A lot of people also think they beat the taxman. Not necessarily. A $ 500 refund won’t make a huge difference on both sides, but let’s say you receive $ 5 000.

It means you have been overpaying by $ 416.67 a month. If you have debt, this amount could have gone a long way to reducing it. You would also have saved on interests. Or you could have invested that money. It would have earned you more than “zero”.

I am not saying you should feel guilty or be upset because you receive a refund. However, I am saying you should review your tax situation and make adjustments.

If you are an employee, ask for a TD1 form and ensure you claim all the credits you are eligible to. The second form that can help is the T1213 one. Canada Revenue Agency will then authorize your employer to lower your tax withholdings.

Filling in these forms will show on your paycheque. It is best to keep your money where it belongs in the first place, i.e. your pockets. The Federal Government does not need extra, free money from you.