78 Tax Tips For Canadians For Dummies

Christie Henderson, Brian Quinlan, Suzanne Schultz

• Publisher: For Dummies
• Year: 2010
• Print ISBN:
  9780470676585
• eBook ISBN:
  9780470677698
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Compiled by an expert team of accountants, 78 Tax Tips For Canadians For Dummies offers practical tax planning strategies. These individual tips offer straightforward advice and insight that will save readers aggravation and money.

Part I

Tips for Everyone

In this part . . .

Tips for Everyone; the title says it all! Take some time to read through this part, no matter what stage of life you are in. Don’t worry, there are very few numbers and complicated calculations lurking among these tips. Instead, we ease you in gently: Have you ever wanted to understand what sorts of taxes you have to worry about? Or if you qualify for “free money” from the taxman? If so, you’ve come to the right place. We also give you some handy pointers on how to stay organized, or — for all you procrastinators out there — how to get organized in the first place. We also have some helpful advice on how to make your charitable donations give you the best tax breaks. And for those who are about to get audited, don’t stress, we’ve got tips for you, too!

#1 Understand the Essentials

We get it. Most Canadians aren’t tax geeks like us. We understand that tax is not known to be the most exciting of subjects. But if you don’t care about your money, who will? Having a basic understanding of the Canadian tax system is an imperative first step to ensure you don’t pay more tax than you should. So, that being said, congratulations on taking this step to know more about taxes! We promise it won’t be too painful.

Though it can be confusing at times, Canada’s income tax system has two very straightforward purposes. The first is to finance government expenditures. The second is to encourage Canadians to make certain expenditures. That’s right — our government cuts you a tax break when you spend money in ways it approves of. For example, the government wants to encourage you to:

Pursue post-secondary education. Tuition fees, textbooks, and interest incurred on student loans are eligible for a tax credit. Even better, scholarships, fellowships, and bursaries are completely tax free!

Work. If you hire someone to look after your kids so you can work, you can deduct childcare expenses. And all employees are eligible for a Canada employment credit — the government’s way of recognizing that we all incur some out-of-pocket expenses in order to work.

Save for retirement. Tax rules are favourable for registered retirement savings plans (RRSPs).

Invest. Dividends from Canadian corporations are taxed at a favourable rate, and only one-half of the capital gain on a sale of investments is subject to tax.

You’re probably beginning to realize that you spend money every year on items you can use to reduce your taxes. And every little bit counts! With this in mind, in this tip we guide you through the nitty gritty of the Canadian tax system.

Understanding Where the Numbers Come From

If you live in Canada it’s pretty easy to figure out what gets included in your total income. Why? Well, to keep things simple, the Canadian government requires you to include all of your worldwide income earned in a calendar year on your tax return. If you earned income, you can pretty much count on the fact that it’s taxable. Of course some exceptions do exist, and we discuss these throughout this book.

The next step is to claim any deductions you’re entitled to. Net income is the amount you arrive at when you subtract these deductions from your total income. You might think this net income figure is the amount on which you should pay tax. Well, no. The amount you pay tax on is your taxable income.

Determining what makes up taxable income

Here in Canada our income taxes are based on the amount of taxable income we earn in a year. Both the federal and provincial/territorial governments levy income taxes on your taxable income (we talk more about these taxes in Tip #2). Your base amount of tax owing is reduced by any tax credits available to you, and the net amount is your tax bill for the year. It stands to reason that if you can keep your taxable income to a minimum and your tax credits as high as possible, you will pay less tax. And with tax rates reaching as high as about 50 percent for some Canadians, this can mean a lot more money stays in your wallet.

Even though taxes are not based on net income, it’s still an essential calculation that’s used to calculate your entitlement to certain tax credits and programs — like the provincial/territorial tax credit (Tip #3), the GST/HST credit (Tip #23), the Canada Child Tax Benefit (Tip #49), and credits for charitable donations (Tip #9), medical expenses (Tip #59), and social benefits (Tip #64).

Taxable income has a different focus altogether. The types of deductions allowed under the taxable income category are not necessarily related to current-year activities. For instance, the calculation of taxable income includes deductions for prior-year losses. In fact, some of the deductions are permissive, meaning they allow for tax deductions based on your personal situation. For example, deductions are available for employee stock options, for residents in northern areas of Canada, and for certain non-taxable payments received in the year.

On many returns, net income and taxable income will be the same; therefore, you won’t have to worry about these deductions at all. However, if you do have additional deductions, it’s important to keep in mind that a difference exists between net income and taxable income — be sure to use the right figures in the right places!

Sometimes you will have so many deductions to claim you won’t need them all to reduce your taxable income to the point where no taxes are owing. Use your available tax deductions to reduce your taxable income only to the point that it equals your total tax credits for the year. If you reduce your taxable income to zero, you won’t owe any taxes, but you might be wasting some deductions. For example, most taxpayers are allowed to claim the basic personal credit amount — this means you would want to report at least that much income (about $10,000, but the amount changes yearly). To optimize your tax situation, you therefore don’t want to waste tax deductions that you can carry forward to future years if it means reducing your taxable income ...

Table of contents

• Cover
• Table of Contents
• Title Page
• Introduction
• Part I: Tips for Everyone
• Part II: Tips for Employees and Business Owners
• Part III: Tips for Investors
• Part IV: Tips for Families
• Part V: Tips for Special Tax Planning Circumstances
• Part VI: The Part of Tens
• Cheat Sheet