As we deal with tax returns, this may be a reminder that we should be doing all we can to minimize taxes. Here are some actions to consider:
Be Aware of the Deductions and Credits Available — Tax laws change annually, so consulting an expert can ensure you’re maximizing available credits and deductions. This can also provide continuity in the event something were to happen to you or a spouse. Encourage younger folks to file a tax return, even if their income falls below the basic personal exemption to generate Registered Retirement Savings Plan (RRSP) contribution room.
Maximize Tax-Advantaged Accounts — Are you fully utilizing tax-advantaged accounts like the RRSP and Tax-Free Savings Account (TFSA)? At last count, only 30 percent of taxpayers earning $250,000+ had fully contributed to the TFSA, with an average unused amount over $23,000.1 First-time home buyers have a new tax-advantaged “gift” from the government: The First-Home Savings Account.
Optimize Asset Location — The location in which you hold certain types of assets can make a difference. Different types of income (interest, dividends, capital gains) may be taxed differently depending on the type of account from which income is generated. For example, if you hold foreign investments that pay dividends in a non-registered account, you may receive a foreign tax credit for the amount of foreign taxes withheld. If the same asset is held in a TFSA, no foreign tax credit is available. By having a comprehensive view of your assets, there may be opportunities to optimize asset location across different accounts.
Plan with a Spouse — If you’re part of a spousal unit with a higher and lower-income earner, there may be income-splitting opportunities. If you expect a spouse to have significantly less income than you in retirement, there may be an opportunity to contribute to a spousal RRSP for the low-income spouse. Retirees may be able to split eligible pension income on their tax returns or elect to split Canada Pension Plan benefits.
“Reduce” Your Refund — Instead of celebrating regular tax refunds, consider adjusting your tax deductions to avoid overpaying taxes throughout the year. Consider reviewing form TD1 with your employer to reduce the tax deducted from your pay. You may also file CRA Form T1213 if you know you’ll have significant deductions in a given year.
Consider Opening a Small RRIF if Over 64 — The pension income tax credit generally becomes available at age 65, allowing for a tax credit on up to $2,000 of eligible pension income. If you don’t have eligible income, consider setting up a small RRIF for the year you turn 65 (sooner, if widowed) to create pension income. You don’t have to convert your RRSP to the RRIF until the year you turn 71, but this way you can still claim the pension tax credit.
These suggestions are just a starting point. As always, seek the advice of a professional tax advisor as it relates to your personal situation.
Be Aware: Interest on Overdue Tax
For Q2 2024, the interest charge on unpaid balances is at its highest rate in over 20 years: 10 percent. The prescribed interest rate changes quarterly. Be sure to file your taxes on time and pay any taxes due in order to avoid this significant charge.
You Asked: How Long Do I Keep Tax Records?
You are required by law to keep tax records for at least six years from the end of the tax year to which they apply (or from their filing date).
1. The latest figures are 2022 statistics for the 2020 contribution year. https://www.canada.ca/content/dam/cra-arc/prog-policy/stats/tfsa-celi/2020/table3c-en.pdf
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