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Key Tax Deductions and Credits for Canadians 2007

For almost a century Canadians have been paying personal income tax. Personal tax was started as a means of financing World War 1. Since then Canadians have been deferring (two thumbs up) evading or avoiding(big red X) paying income tax.

One step to ensure that an income earner pays no more tax than he or she must is to understand there is an essential difference between a deduction and a credit.
Canadians also need to learn that getting a large tax refund year after year is not the best idea. Apparently that is a hard lesson to learn because at present there are millions of dollars of unclaimed refunds according to the Canada Revenue Agency. We can be assured that the owners of those refunds are NOT the same people who complain about the government.

Only 50% of a capital gain is subject to tax. But don’t write this in stone or even felt pen. One certainty about taxes is that little ever stays the same. It is a game of moving numbers!

If you are your own boss you must pay both employer and employee portions of the Canada Pension Plan. As of 2006 that was 9.9% up to a maximum of $3821.40.

So let’s try to pin down those tax numbers.

1. State all sources of income for the year. In the past most people only dealt with employment income. Today there are contractors, small business owners, and investors. Some types of income such as capital gains and dividends are more favorably taxed. If you are self employed you can deduct certain expenses incurred to earn income.

2. Take advantage of every available deduction. Why? Deductions reduce income and when income is reduced there will be less tax charged. It is possible to have enough deductions to put your income in a lower tax bracket. For example:

3. Tax credits reduce tax owing. Credits are only useful if you make enough money to owe tax. Only 15.25%(another moving number) of a credit is used to offset tax owing. Remember a credit can only be used to reduce tax owing to zero. Often times the credit is subject to certain limits. For example medical expenses can be a tax credit only if they exceed 3% of net income up to a limit of $1884.

So let’s discuss the provisions for taxpayers in the last 2 federal budgets. Have they had any significant broadly accessible positive impact on taxpayers?
Let’s examine a few of the changes and who they might benefit.

Let’s do some number crunching on a couple other tax credits to see their TRUE impact on a taxpayer’s bottom line. That is all that matters is the number on the refund or balance owing line right?

Everyone who is an employee gets the employment tax credit. First of all correct me if I am wrong but I seem to remember that it was $500 back when it was just an idea of the Finance Minister’s. Never mind let’s take the $250 credit and multiply it by 15.25%. The answer is that your taxes will be reduced by $38.13. Does that make you feel better?

The public transit credit could be more significant. At $75/month for 12 months that equates to $900 spent on bus passes. $900 x 15.25% will recover $137.25 of taxes you’ve paid.

Here are some notable changes from the 2007 budget of the past few weeks:

The ever changing tax regime will ensure that accountants, financial planners, and tax preparers will field many questions in the years to come.

A necessary element of successful financial management involves advance tax planning. The best way to pay as little tax as legally possible is to give yourself a post Christmas present. One hour on December 27. Review your income, RRSP contributions, donations, and medical expenses for the year. That way come March 1 or April 30 you won’t be ripping out your hair. Unless of course you like stress! Doing your own tax return is very easy if you simply give yourself enough time.

Along with taxes here is a brief comment on the other inevitability of life. Everyone who has relationships and assets must have a will. The more relationships and assets you have the more your need for a will. If the task seems too daunting I can provide some very useful organizational tools to get you started. Also having named beneficiaries on assets such as life insurance policies and registered plans are a bare minimum. If you need even more motivation ask yourself these 2 questions:

1. Do you want government rules to determine how your estate is divided when you aren’t here?
2. Do you want to leave that decision making burden to your relatives?

Til the next time!

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