Which Canadian Personal Income Tax Deductions are Worth the Hassle?
As spring draws near, Canadians can look forward to cherry blossoms and spring skiing. Another event is the filing of their personal income tax returns.
With all the tax deductions and credits rules in the Income Tax Act, compiling all the information for your tax accountant to complete your personal tax return accurately, timely, and economically can be a challenge. Accounting professionals want the same things for our clients, but we are faced with an increasing amount of new and changing income tax laws to address every year.
I find that educating the Canadian taxpayer client on the tax value of various common tax deductions and credits very effective in reducing the taxpayer’s stress. Who has an entire weekend during Spring to locate all of the big tax receipts such as the employment income receipts, RRSP receipts, trading summaries, and all the little receipts such as the kids’ swim lessons and the mustache-inspired donations you made to your neighbor during the Movember campaign.
We are here to assist the average Canadian taxpayer and help you to stay focused on the important details in life.
This article discusses the tax value of all the common deductions and credits.
First of all, all income slips (hint – income slips have a name that starts with a T such as T4, T5, T3, T5013) from your employer(s), investment advisor(s), and banks, regardless, of the amount, should be kept safe and forwarded to the accountant. Failure to report the income from these slips result in significant penalties and even bigger penalties for repeat offenders.
As for the six tax Canadian personal income tax deductions and credits that are high in tax value:
- RRSP – this deduction lives up to its hype in tax value, especially for the high income earners. Even if the taxpayer only worked a partial year due to maternity or schooling, undeducted contributions can be carry-forward to a future when income is expected to be higher.
- Child care expenses – this deduction has high tax value for a family where both parents work and the children are young. Depending on the age of the child, a maximum $ 7000 per child is available as a deduction for the lower income spouse.
- Support payments to an ex-spouse are fully deductible for every dollar paid so retain the divorce agreement, cancelled cheques and other proof of payment.
- Donations – this is a credit. If the taxpayer donates more than $200 per year, it is a good idea to locate all the receipts because CRA will credit the taxpayer 43.7% of every donation dollar above $200.
- Medical expenses – see my comment below on medical expenses. A taxpayer with aging parents qualifies for various deductions and credits, which have high tax values.
- Tuition – if you or your child are in attendance at a designated institution and receive a T2202A as proof of tuition and attendance, other credits such as education and textbook credits will be triggered, resulting in a large reduction in taxes. If the child can’t use all the available credits in the current tax year, a maximum of $5000 can be transferred to a parent.
There’s also factors where these deductions and credits are not worth fussing over:
- Medical expenses – unless the taxpayer or a family member has serious medical issues, most young families will not benefit much from this tax credit. The reason is that only amounts above 3% of the net income of the lower earner qualify as a credit. For most taxpayers, medical expenses need to exceed $2152 before any tax benefit will kick in. The bottom line is this: if your medical expenses are low, don’t waste time looking for the receipts.
- Children’s fitness and arts expenses – The maximum tax credit available per child is $1,000; $500 for the fitness and $500 for the arts. This tax credit is worth 20% in tax value or $200 maximum. Amounts spent over $500 for each category do not create any additional tax benefits, so keeping receipts once you’ve gone beyond this amount have no value.
- Donations totaling $200 or less are entitled to 20% tax benefit. In other words, total donations of $150 result in $30 tax reduction.
This article discusses the tax values of various tax deductions and credits common to Canadian taxpayers. With this in mind, taxpayers can now better decide how to allocate their time in assembling the tax information for their professional tax advisors.
(This article is based on the current combined federal and provincial personal tax rates for the province of British Columbia.)
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