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Why summer is the perfect time to start thinking about tax season

With summer officially here, people’s thoughts are turning to flip-flops, picnics, and… taxes?

Maybe not, but in fact, there’s good reason Canadians may want to be thinking along those lines to maximize that return right now.

“Tax planning should be done throughout the year,” says David Lee, Financial Advisor, BlueShore Financial. “If it’sleft to the last minute during the April tax season, you may be forgoing a lot of savings and benefits.

“Tax planning is an integral part of any wealth-building strategy and taking the time to structure your affairs to minimize the amount of tax you have to pay will provide you with more money in your pocket,” he says. “Being proactive and making your finances a top priority will give you more time to think about your financial objectives.”

Where to start

Begin by looking at last year’s return. If you owed money, you can figure out whether this year's income will be more, the same, or less and implement some suitable tax strategies that are suitable for you. If you received a refund, you can reinvest that refund immediately into an RRSP, RESP, or TFSA.

Review your recent CRA Notice of Assessment to review taxable income, deductions, and allowable RRSP contribution limits.

“RRSP contributions can be made anytime throughout the year and not only during RRSP season – the first 60 days in the beginning of the next year,” Lee says. “Rather than scrambling last minute, my clients contribute on a monthly basis to take advantage of a dollar cost-average strategy in their portfolios, and it works a lot better with their cash flow. 

“Most Canadians have a busy lifestyle, and an automatic contribution ensures that they do not forget to make one,” he adds. “The other benefit of contributing early is it will maximize tax-deferred growth within an RRSP.”

Reduce your taxable income

People who may be in a higher marginal tax bracket this year will also want to make smart tax moves now by reducing their taxable income.

Some strategies to do that include moving taxable investments from a non-registered savings account into TFSA accounts for tax-free growth and contributing to RRSPs to create a deduction from taxable income, Lee says. People could also consider making larger contributions now and claim deductions in multiple years and have the high-income-earning spouse contribute to a spousal plan.

“Individuals in a high tax bracket and without a pension plan are better off saving in an RRSP because of the tax savings now and the potential lower tax bracket in retirement,” Lee says. “Individuals who receive large refunds annually may want to consider reducing the amount of taxes withheld at source from their payroll to keep more money in their pockets now rather than the government holding onto it.”

As with RRSPs, contributions to TFSAs are best made early in the year to maximize tax-free growth.

Although RESP contributions are not tax deductible, people can take advantage of the Canada Education Savings Grant (CESG), which provides a matching contribution of 20 per cent on the first $2,500 contributed annually.

“This is another tax-deferred investment strategy,” Lee says. “The tax on the income and growth generated by the investments is deferred until it is withdrawn to fund a child’s post-secondary education. Typically the child is in a lower tax bracket than the parent at the time of withdrawal.

“Any unused entitlement can be carried forward,” he notes. “Using carry-forward room to catch up on missed contributions can be very lucrative with the grants.”

Save those vacation and summer camp receipts

Right now is also the time to put aside sales receipts—or to set reminders for yourself to start keeping them. There are several overlooked tax credits and deductions that Canadians could be using to their advantage.

People often miss medical expenses, for example, such as travel medical insurance, extended health-care premiums, and certain alternative health-care services, such as traditional Chinese medicine if you live in B.C., where the profession is regulated. (Allowable medical expenses vary from province to province.)

The cost of kids’ creative, outdoors, and development programs are eligible for the 15 per cent nonrefundable Children’s Arts Tax Credit on an amount up to $500 per child. Those include programs like Girl Guides.

People should also keep receipts for kids’ summer camps.

“The cost of summer camps qualifies as child-care costs,” says Jamie Golombek, managing director of tax and estate planning at CIBC. These include day camps and day sport schools as well as overnight sports schools or camps where lodging is involved.

Bus passes are another item to track. The Public Transit amount allows you to claim the cost of passes for unlimited travel within Canada on local buses, streetcars, subways, commuter trains, and local ferries. If you pay for a monthly transit pass for your child, you can claim that on your taxes too.

More tax deductions to keep in mind

With the Home Buyers amount, meanwhile, you can claim up to $5,000 if you or your spouse or common-law partner buy a qualifying home assuming you or your spouse or partner haven’t owned a home in the preceding four years.

Business owners have unique circumstances.

Canadian business owners can start planning early on a tax-efficient strategy to pay themselves with an optimal salary and dividend payout,” Lee says. “Also, business owners with non-capital losses from the past can use them to offset other business income in any given year and these can be carried back three years or carried forward up to seven years. 

Another pressing item to check off your tax-related to-do list: check who is named as your designated beneficiary on registered plans.

“Make applicable changes if necessary,” Lee says. “This could be a costly mistake with tax consequences later on in life.”