Q: As a Canadian senior, how can I get a better income tax return?
A: Alas, the Tax(wo)man never retires, even if we do!
For many of us as we retire, and certainly as we age, our tax world can shift. As employees our employer likely handled tax remittances and deductions for us but now (unless we are receiving a DB Pension Plan) we may be required to remit quarterly tax installments and handle all manner of tax issues ourselves.
To make our tax life simpler we can choose to have taxes withheld at source from CPP and OAS payments and from RRIF withdrawals. But there is no mechanism to have taxes withheld from the interest and dividend income earned in non-sheltered investment accounts or from rental income and other sources.
We are required to remit quarterly tax instalments to the Canada Revenue Agency if the net tax owing is more than $3,000 in the current year and in either of the two previous years ($1,800 in the province of Quebec). You can order CRA handout P110 on Paying Your Income Tax by Installments for a discussion of your options.
Our first line of defence is to explore all our options to ensure we aren’t paying more tax than required. Coming up is a series of three articles related to tax.
1. Tax Deductions
- Deductions, such as RRSP contributions and Carrying Charges, allow us to reduce the amount of income that is subject to taxation
2. Tax Credits
- Credits that help reduce the amount of tax paid
3. Tax Shelters
- Tax-shelters generally don’t eliminate tax but instead defer taxes to the future (TSFA accounts are the exception). We’ll also cover income splitting or reducing our own tax burden by ensuring that some of our income is taxed in our partner’s hands.
A quick detour for the fine print – remember it is important to get qualified advice on your personal tax situation – what follows is simply a general guide. See the Canadian Revenue Agency web site or Tax Tips.ca for some helpful resources.
Most of us are aware that we can deduct contributions to Registered Retirement Savings Plans from our taxable income and therefore reduce tax payable. We’ll look at that in our third article covering tax shelters.
Tax payers who move away to attend post-secondary education and then move back to take employment or those who move more than 40km for a job may be able to claim some of their costs at tax time. If you are contemplating a move in retirement, look into it! Perhaps you will “retire” across the country and take a job at Home Depot while you renovate that new retirement home.
Carrying Charges and Investment Costs
Be sure to track fees for safety deposit boxes, borrowing costs for non-sheltered investments, investment counselling fees (not brokerage fees) and accounting fees (not tax returns). Administration fees for registered accounts (RRIFs, LIFs) and the new TFSAs are not eligible.
Eligible Business Expenses
If you have been an employee throughout your primary career, you are well aware that eligible deductions from your income are few are far between. Perhaps you have always yearned to start your own business – now may be the time to unleash your “inner entrepreneur”! Businesses and the self-employed have more opportunities to reduce taxable income.
If you work from home, you have the ability to deduct a portion of home-related expenses such as a share of the utilities, insurance and maintenance costs. The size of the home office determines the amount that can be deducted.
Business owners can deduct any reasonable expenses they incur to earn business income. Office supplies, legal and accounting costs, fees for professional memberships and 50% of the cost of business related entertaining are all deductible. Automobile expenses related to business use of a vehicle are also eligible.
Reasonable salaries paid to spouses and other family members for legitimate contributions to business operations are deductible and provide another avenue for income splitting. The CRA has a number of publications for further details. See IT-514 Work Space in Home Expenses; T4002 Business and Professional Income: RC4070 Guide for Canadian Small Business.
Is there a way for you to create meaningful work and deductible business expenses?
Come back tomorrow for Part 2 in our Tax Strategies series covering Tax Credits.
About the Authors: Heather Compton has presented seminars on financial and retirement lifestyle issues for over 30 years. She retired as Vice President and Senior Investment Advisor with a major financial services company. Heather and husband Dennis Blas co-present retirement seminars for a variety of corporate clients and are the co-authors of Retirement Rocks! Canadian Boomers Invest in Life. You can find their book online or in independent bookstores. See more of their advice at Retirement Rocks.