Yahoo Finance 2012 tax season: Be prepared and save money
The tax return countdown is on Canada. How prepared you are for this annual inevitability cannot only help alleviate tax season stress but it can also help you save money.
The deadline to file a tax return in Canada is April 30, 2012. That's ample time to tally your expenditures and yet each year thousands presumably leave it until the last moment.
"Tax planning really shouldn't be left until the annual tax filing deadline arrives," says Jason Round, head, Financial Planning Support, RBC Financial Planning in Toronto. "There are strategies you can benefit from throughout the year that can help you boost your tax savings."
Cleo Hamel, senior tax analyst at H&R Block in Calgary, agrees.
"There are a large number of people that do wait for varying reasons," she says. "We tend to see an interesting trend: Once the Easter break comes and goes, there seems to be a sense of urgency that emerges."
Don't wait to organize your tax files, she advises.
"The big thing is record-keeping. With the changing of the year, from January 1st, you really should be getting all of your information together," she says. "That way, if you do wait until the last few weeks in April to file, you're really not in a panic."
Tax credits and deductions
Understanding all of the different tax deductions and credits is critical, he adds.
"There's a good chance people are doing some of the things that would generate tax credits and they may just not be aware," he says. "Every year there's a new raft of tax credits introduced by various levels of government and sometimes it's tough to keep track of them."
In terms of saving money, be sure to take advantage of tax credits and deductions like:
medical expenses
child and dependent care
tuition, education and textbooks
children's fitness and art credits
first time homebuyer's credits
charitable donations
interest paid on student loans
"Those things do require receipts, they require proof, and as a taxpayer I have to go after those myself," Hamel says. "Filing on time is important, especially if you owe money.
"Pick up a copy of the guide that the CRA (Canada Revenue Agency) puts out every year. It'll provide a refresher and a peek at what's new for the year. Also, have a central location where everyone in the family will be placing all the receipts."
Receipts could mean a bigger tax refund
Speaking of which, no receipt is too small.
"Don't think a little bit of money or a receipt of small value has no implication," Hamel says. "I always encourage individuals to collect every single receipt. Every dollar does count."
For those inclined to invest in do-it-yourself tax software, be sure to stay atop of annual changes to your chosen software suite and general taxation policies.
"If you're an individual that doesn't do that you can still use software but there's always a question in the back of your mind 'did I get everything that I'm entitled to?' or 'have I missed something?'" she asks. "It's really a matter of how comfortable you are with doing so. Software these days, if you know what you're doing, works just as well (as hiring an accountant). However, it's still worthwhile every few years to have a professional do it for you just to ensure you're taking advantage of everything that you can."
Avoid penalties for late filing
And it's important to comply with filing deadlines to avoid paying a penalty. A penalty is a minimum of five per cent of the balance owing on your return, plus another penalty of one per cent of the unpaid tax, multiplied by the number of months the return is not filed (to a maximum of 12 months).
Filing at the last minute won't tick the CRA off but repetitive tardiness could prompt the agency to stick your file under the microscope.
"The CRA does do random searches," she says. "Some of the more common types of expenses that do get reviewed are things like medical expenses, childcare expenses, moving expenses, tuition credits for students and to parent.
"Your compliance history is also an area where the CRA might feel you need to be audited."
Round says it's a matter of the items being claimed on a return that are likely to raise CRA red flags.
"For instance, something that's a significant deduction against taxes such as moving expenses. You have the ability to write-off moving expenses under certain conditions. If that's a significant dollar amount . . . that seems to trigger more frequently that follow-up from CRA," he says. "It may not be a full audit but it's the substantiation of that particular line item on your tax return."
Income splitting not just for seniors
Also noteworthy, Round highlights the benefits associated with income-splitting.
"It's become more commonly known over the last few years largely because of the changes around pension income splitting which is applicable for seniors," he says. "Sometimes what gets missed is there are opportunities for people who are not seniors and that do not have pension income to take advantage of some of these provisions as well."
To that end, one basic strategy is for the higher income earning spouse pay the household bills and have the lower income spouse make the investments.
You can find tax savings by using other straightforward strategies such as spousal RRSP contributions and spousal loans, he adds.
"Traditionally that's been seen as something that applies to high net worth individuals with a couple million dollars. But there's certainly an application there for middle income people that might have $50,000 to $100,000 in investment savings to put a spousal loan process in place," he says. "The higher income spouse can loan money to the lower income spouse so they can do the investment and therefore have the income taxed on their end.
"There's never been a better time to do this as the prescribed rate from Canada Revenue Agency is one per cent."
Use tax-advantaged savings and investment accounts
In addition to the aforementioned, RBC Financial Planning also recommends taking advantage of tax-free savings accounts (TFSAs) and RRSPs.
With a TFSA, money grows tax-free with no tax on your withdrawals; you also can contribute up to $5,000 per year, with the ability to carry forward any unused contribution room to future years.
With an RRSP, if you made a contribution for this past 2011 tax year but anticipate you'll be earning more income in future. It may be advantageous to carry forward the resulting RRSP tax deduction to a future tax year.
