Four Tax-wise Strategies

Maximize your TFSA contribution in 2014

When the Government of Canada introduced Tax Free Savings Accounts effectively beginning in 2009, it set the contribution limit at $5,000 per year.

The plan was designed to allow for increases to the annual contribution limit to keep pace with inflation, but with a stipulation: the contribution limit would rise only in $500 increments.

So indexation from several prior years had to be added together to make up $500 (when rounded) for the increase to take effect.

2013 was the first instance of indexation resulting in an increase in the TFSA contribution limit,” says Richard C. Weber, CPA, CA, a tax specialist in Oakville. “Starting in 2013, Canadian residents 18 years or older could contribute up to $5,500 to a TFSA. The limit for 2014 is also $5,500.

Plus, they can add in any unused contribution room from previous years, and any amounts withdrawn from a TFSA may be added to the contribution room for the following year.

TFSA contributions are not tax-deductible. Nor is the interest expense incurred on any funds you borrow to put in one,” says Weber. “But the benefit of a TFSA – and it’s a big one – is that any income generated on the funds you contribute is tax-free. Also, since contributions made to a TFSA are not tax-deductible, amounts withdrawn aren’t taxable.”

The types of investments one can make in TFSAs are generally the same as those in RRSPs. Cash, mutual funds, bonds, guaranteed investment certificates and securities listed on a designated stock exchange are all eligible.

Income spliting: share your investments, cut your tax bill

It’s all in the family. At least, that’s the way the Government of Canada seems to see it when it comes divvying up taxes on investment income between spouses or partners.

If someone earning income from their non-RRSP investments is in a higher marginal tax bracket than their spouse or partner, they might consider transferring the underlying investments or lending the funds to invest to the other,” says Richard C. Weber, CPA, CA, a tax specialist in Oakville.

This way, the couple will reduce their tax burden on that investment income by effectively accessing the lower marginal tax rates of the lower-income spouse.”

There are, however, adverse tax-attribution rules that don’t allow property to simply be transferred between spouses for income-splitting purposes. The one who receives the benefit must pay fair market value consideration.

But you can lend your lower-income spouse the funds to invest, and charge them the same applicable interest rate that the Canada Revenue Agency prescribes – is one per cent annually as of January 1, 2014 – on the amount of the loan,” Weber explains.

If those investments should yield, for example, a five per cent annual return, the spouse would repay the 1 per cent annual interest on the loan, and then include the net four per cent annual return as part of their taxable income. That four per cent would then be taxed at their lower marginal rate.” But be careful. The loan must be structured in a particular way. “An equivalent-value promissory note must be exchanged that bears interest at that applicable rate prescribed by the CRA,” says Weber.

There are other considerations and requirements that must be diligently met, such as ensuring that the interest is actually paid each year or by January 30 of the following year at the latest.

Different types of investments produce different types of income for tax purposes and these are subject to different tax rates. So consult a Chartered Professional Accountant in your community to help you find the most effective tax-saving strategy for you and your family.

The Healthy Homes Renovation Tax Credit

This gift from the Government of Ontario is designed to help with the cost of making homes safer and more accessible, so certain family members who have seniors living with them may also be eligible to claim it.

The best part? The HHRTC is now a permanent refundable tax credit that can provide you with a tax refund when you file your tax return. It doesn’t just reduce taxes the way the more common non-refundable tax credits do.

Similar to the home renovation tax credit offered in 2009, those who qualify can claim up to $10,000 worth of eligible home improvements on their tax returns,” advises Dan Dickinson, CPA, CA, of Wilkinson & Company LLP in Belleville. “Calculated at 15 per cent, this makes the maximum refundable tax credit worth up to $1,500 per household.

To claim it, you must 65 years of age at December 31, 2013, or live with a family member who is a senior.”

Not all renovations qualify, however. The work or upgrades must have been billed for in the year in question and be ones that make a home more accessible or safer for a senior, like installing grab bars or walk-in bath tubs; widening doors; adding ramps, lifts or automatic garage door openers; and many, many more.

Seniors or people with seniors in their home should review the types of expenses that qualify or consult their accountants if they are unsure,” says Dickinson. “Individuals who are eligible for a Disability Tax Credit Certificate may also be able to treat some of the eligible expenditures as medical expenses.

This is especially true if the upgrades aren’t expected to increase the value of the home, and were incurred to enable a family member to gain access to the home, or to be mobile or more functional in it.”

To claim the credit, complete Schedule ON(S12) of your tax return and enter the amount spent on eligible renovations next to box 6311 on form ON479.

You don’t have to submit your receipts with your tax return, but hold on to them in case the Canada Revenue Agency asks to verify your claim.

For a more complete list of eligible expenses, Dickinson recommends you review the list the Ontario Ministry of Finance has posted at www.ontario.ca/taxes-and-benefits/what-expenses-qualify-healthy-homes-renovation-tax-credit.

Move closer to work and save on taxes, too

Is the two-hour commute keeping you from accepting that job offer with a new company? Would you consider moving closer if you knew that many of the costs of relocating may be tax-deductible?

Providing you move at least 40 kilometres closer to start a new job or go to school, some of the biggest costs of relocating can be deducted for income tax purposes,” explains Edward J. Barker, CPA, CA, in Owen Sound.

The realtor’s commission, legal fees, mortgage fees, temporary living quarters and even the cost of hooking up your utilities in the new place are all valid deductions that many people overlook,” says Barker. “What you can’t deduct are the expenses you incurred to get the old house ready for sale, like a new roof or windows. Nor can you deduct the upgrades you must leave behind, like draperies or a tool shed.”

But if you have to leave the old house vacant for a period of time while you’re trying to sell it, the maintenance costs – from heat and insurance to clearing the driveway or cutting the lawn – are all tax-deductible.

It’s a little different if you received a reimbursement or an allowance from your employer for your eligible moving expenses.

Then, you can only claim moving expenses on your tax return if you include the amount they gave you in your income, or if you reduce the moving expenses you claim by the amount already received from them.

Much of the same applies to students moving for school,” Barker says. “Deductions must be at least $100, and can be applied to those parts of scholarships, bursaries and grants that are taxable.

Or, use them to reduce other kinds of income, such as that from part-time employment. You can even deduct the costs of moving back home for a summer job.”

If you don’t have enough scholarship or work-related income to claim the expenses in the current year, you can carry them forward to a future year when you do have enough taxable income to make claiming them worthwhile.

 

Source: The Institute of Chartered Accountants of Ontario www.icao.on.ca

 

The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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