Tax time: It's a family affair
We tend to think of tax filing as an individual matter. But if you have a spouse or dependants, it can often pay to take the larger family picture into account when filing your tax return.
Here are a few strategies that may help reduce your family's total federal and, in some cases, provincial tax bill.
Child care. Be sure to claim all qualifying child care expenses. Frequently overlooked expenses include day and summer camp.
Tuition and education tax credits. If you have children attending post secondary school, tuition fee tax credits and education credits that they don't need to reduce their tax payable to zero can be transferred to a supporting parent or grandparent.
Eligible dependant credit (formerly Equivalent-to-married credit). If you are single, widowed, divorced or separated and you support a child (or other family member), consider claiming the "equivalent-to-married" credit.
Filing for minors. If your children earn income in the year, encourage them to file a tax return. In most cases, they will have no income tax liability, but reporting earned income generates RSP contribution room, which can be carried forward indefinitely and used in a future year, when they have taxable income. If your child is 19 years of age or older, filing a return may provide a GST credit, which is paid quarterly.
Charitable donations. The first $200 earns a federal tax credit of 15 per cent. Donations above this amount get a 29 per cent federal credit. Charitable donations made by either spouse can be reported on one tax return. In many cases, pooling the contributions will increase the amount that qualifies for the 29 per cent credit. This strategy can also maximize the provincial tax credit.
Medical expenses. Medical expenses qualify for a tax credit on the amount exceeding three per cent of net income to a dollar threshold (whichever is less). Pooling expenses on the return of the spouse with the lower income may generate a larger credit, as the amount above the threshold will be greater. Remember that you can claim medical expenses for any 12 month period ending in the tax year (provided you didn't include them last year). Choose the 12 month period that includes as many expenses as possible to maximize the credit.
Political contributions. You and your spouse will be better off splitting political contributions in excess of $400, as tax credits are higher at lower contribution levels. For example, for federal political contributions, donations up to $400 generate a 75 per cent tax credit, while amounts between $300 and $350 generate a credit of only 50 per cent and 33 1/3% on the next $525. There is no additional credit for donations beyond $1,275. Some provinces also allow credits for political donations to provincial parties. Donations must be made in each spouse’s name as political donation receipts cannot be shared between spouses like charitable donations and medical expenses.
Age tax credit. If the recipient does not need all of the age 65 tax credit in order to reduce his or her tax payable to zero, the unused portion can be transferred to a supporting spouse.
Disability tax credit. The disability tax credit can be transferred to any supporting relative.
Dividend tax credit. If one spouse has little income, but has received taxable Canadian dividends eligible for the dividend tax credit, the couple can elect to report the dividends on the higher-income spouse's tax return if it increases the married credit. While the income will be taxed in the higher-income spouse's hands at the preferential rate for Canadian dividends, the transfer will increase the spouse tax credit. (Note that all dividend income must be transferred, not just a portion.)
We suggest you have a tax professional run through the calculations for both options. You can then file using the option that results in the combined lower tax.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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