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‘Help! Where should I save?’ and other tax time questions from Canadians

 

The tax time struggle is real
The tax time struggle is real

With only days left until the tax filing deadline, it’s time for all those last-minute filers to start frantically searching online for answers to some of their burning questions.

While some answers shouldn’t be found online (please, if you have to look up a medical condition, just go to your doctor), there is plenty of information out there on some of your most pressing tax questions. Lucky for you, last-minute filers, we’ve rounded up some of the top questions answers to help you get your tax situation in order.

BMO Wealth Management surveyed 1,516 Canadians in late March on what their biggest questions were this tax season. Here’s what they said:

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1. Should I contribute to my RRSP or TFSA?

46 per cent of Canadians surveyed were stumped on which savings vehicle is ideal for getting the best bang for their tax dollar. John Waters, Vice President and Head of Tax & Estate Planning for BMO Wealth Management says that to know the answer, you need to figure out what your marginal tax rate is today and what you expect it to be in retirement.

“Generally, if you expect your marginal tax rate to be lower when you retire, an RRSP is more beneficial, but if you expect your tax rate to be higher in retirement, then a TFSA may be a better option,” says Waters.

That advice is corroborated by social policy consultant John Stapleton, who previously told Yahoo Canada Finance that while it may see backwards, TFSAs are often the right savings vehicle for low-income earners to maximize tax benefits.

“For the normal well-to-do person, you’d always maximize your RRSP first. Then you’d possibly top it up with a TFSA,” says Stapleton.

“If you’re low income, you’re in an alternative universe where you would always buy a TFSA first.”

It’s recommended you speak with a financial professional, regardless of which income bracket you’re in, to figure out what financial vehicle is best for you.

2. When is interest deductible for tax purposes?

When borrowing money, there are very specific circumstances in which you can actually deduct the interest incurred on that loan. 45 per cent of Canadians surveyed were scratching their head about this one.

“The purpose of the loan determines if the interest you pay on it is tax deductible or not. For example, if you borrow money to buy investments to generate taxable income such as interest or dividends, you can generally claim the interest you pay on the loan,” says Waters.

This can include money you borrowed to pay for business expenses, to buy investments, or even your mortgage. Again, you need advice from a professional for your specific situation to know for sure.

3. How is my TFSA contribution limit calculated?

The TFSA program was established in 2009, and for every year the program has been in effect, all Canadians have the same per-year contribution limit ($5,500 for 2016, for example). Your personal contribution limit is set by how much of the limit you have used previously. If you were to have never contributed to your TFSA, at the end of the 2015 tax year, your contribution limit would be $41,000 ($5,000 limit for 2009 through 2012, $5,500 limit for both 2013 and 2014, and $10,000 limit for 2015). The contribution limit of $5,500 in 2016 means your total available contribution room for the life of the program would be $46,500.

If you had contributed $1,000 in 2010, $2,000 in 2013 and $3,000 in 2015, then your contribution limit for this year would be $40,500.

4. What should I do with my tax refund?

While the 38 per cent of Canadians surveyed probably hoped for a different answer like “blow it on a trip to Mexico,” the reality is that this is the perfect opportunity to boost your savings.

“Using the money to make a 2016 RRSP contribution now instead of waiting until the deadline will give you almost an extra year of tax-deferred growth,” says Waters.

“Other options could include making a TFSA contribution, paying off credit card debt, topping up savings, making a mortgage payment or saving for education.”

If you do decide to treat yourself to a little something, do so responsibly.

“I know it sucks, but maybe do an 80/20,” Dennis Tew, Head of Business Strategy at Franklin Templeton Investments previously told Yahoo Canada Finance. “You save 80 per cent of it and spend 20 per cent of it. But the younger you are it’s only going to be to your benefit for the rest of your life. People that start saving in those last 10 years of retirement are a lot worse off than those who saved a good chunk of everything they earned all the way through.”

5. How does making a contribution to a registered charity benefit me from a tax perspective?

It’s common knowledge that you can get a tax break if you make a donation to charity — heck, if it’s your first time, you can even get a bonus credit — but exactly how it impacts your taxes is more of a mystery to at least 36 per cent of people surveyed.

For starters, you won’t get money back for your charitable donation.

“You’ll receive a non-refundable tax credit if you make a charitable donation,” says Waters. “This can only be used to reduce tax owed. However, it’s important to remember that, if you aren’t subject to tax, you won’t get a refund.”

At the federal level, the first $200 of donations you make in a year qualifies for a 15 per cent tax credit under most circumstances, according to The Globe and Mail. Whatever amount after that you are claiming for donations that year qualifies for a 29 per cent credit on your federal taxes.

If you’re a first-time donor, you can claim the First-Time Donor Super Credit, which allows you to increase the federal credit on your donations by an additional 25 per cent, up to $1,000.

There’s an additional provincial tax credit for donations, too, which varies depending on your province.

If you don’t want to claim a donation made in your current tax year, say if you wanted to maximize the tax credit on your charitable donations, you have the option not to claim it for up to five years.

Did we miss anything? What are your most pressing tax-related questions?