The following information is for general use only and may or may not be applicable to your specific situation. Furthermore, Income Tax legislation is constantly being modified and as such, the information presented here may or may not be relevant with respect to current Income Tax legislation.
• Tax Overpayment
- If you are usually in a refund position when you file your tax return, it means that you have had too much tax deducted during the year. In essence, you have provided the government with an interest free loan. In order to improve your cash flows, you can provide information to the government with respect to the deductions that you will be claiming to reduce your income taxes. In turn, your employer can reduce the amount of income tax withholdings from your pay, which improves your cash flow position.
• Utilization of Tax Losses
- Tax losses should be applied against taxable income in order to reduce the taxes owing during the year. If you have operated as a sole proprietor and suffered losses, you can use these losses against income for the three years preceding the loss or carry it up to ten years in the future. If you owned the shares of a small business that went bankrupt or loaned money to a small business that was never repaid, you could potentially be entitled to claim Business Investment Losses. You should consult a professional when attempting to determine whether your loss qualifies as a Business Investment Loss.
- Capital Losses occur upon the sale of income producing property (i.e. stocks) and can be utilized against gains upon the sale of similar properties. Capital Losses can also be used in the three preceding years in which the loss occurred, but can be carried forward indefinitely. A number of options exist to maximize the utilization of these losses, but should be discussed with your financial professional.
• Automobile Expenses
- If your employer provides you with an automobile for use during the course of your employment, you may want to consider using your own vehicle for work. With an employer provided vehicle, a taxable benefit is conferred to the user which increases your income. Using you own vehicle and receiving an automobile allowance may reduce your tax liability.
• Investment Income
- Investments should be made by the lower income spouse so that any income earned is taxed in the hands of the lower income spouse.
• Income Splitting
- For those people operating a small business, you can pay low-income family members a reasonable amount for any work they perform for you. These payments will be taxable income to those family members and can potentially be taxed at a lower rate. Remember, payments must be reasonable given the nature of the work performed.
- You can also pay low-income adult children for baby sitting and other child care services, as long as these payments are reasonable. These payments are deductible in computing your income (or your spouses, depending who earns more).
• RRSP
- You should try and plan to maximize your RRSP contributions every year. For those earning employment income (i.e. T4), RRSPs are the most effective way of reducing your taxable income.
- During periods when you are earning low levels or nil income (i.e. maternity leave, in-between employment) you can withdraw from your RRSP and pay tax at the lowest marginal rate.
• Installments
- If you are self-employed, work on commission or expect a substantial bonus payment, you should plan ahead and make tax installment payments quarterly on income earned that does not have tax deducted at source. If the government requires you to make installments and you remit these late (or not at all) you will be charged additional interest when filing your tax return.