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:

  • Austen P. from the US is an actor who was offered a role in an Alberta made movie. He moved here with his 8 year old daughter. It cost him $4000 to move here. He pays child care expenses of $200/ month. His union dues are $80/ month.
  • In 2006 Carl earned $45,000. He is able to subtract $4000 + $2400 + 960 from his income of $45,000. After those 3 deductions his net income is $37,640. He calculates that if he does a $2000 RRSP contribution he will reduce his income below $36,378 the upper end of the first tax bracket.( remember the brackets will be different for 2007).

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.

  • Roxanne is employed by Red Dress Inc. In 2006 she purchased eyeglasses that cost her $585 and 10 massage sessions that cost $600.Neither is covered by a health plan. Her net income was $41,000. Therefore if her medical expenses exceed $1230 she can claim the excess over that number. She thinks she is short until she remembers that she pays extended health care premiums of $70/month to equal $840. Thus the $795 over and above the $1230 is a tax credit. Remember that only 15.25% of the $795 will offset tax owing: $795 x $15.25% = $121 credit.

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.

    1. The reduction of the GST. This will benefit consumers and businesses.
    2. Increase by $1000 each of the age and pension credits. Retirees receiving pension income over a certain age will benefit.
    3. Scholarships and bursaries do not have to be declared as income. Students get a break here.

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:

  • A $2000 tax credit for children under 18. Remember that equates to only a $310 tax savings. However it is transferable between spouses.
  • Quarterly installments must now be remitted only when tax owing exceeds $3000.
  • The capital gains exemption has now been increased to $750,000 a 50% increase.
  • There is no minimum RRIF withdrawals for retirees age 70 and 71.
  • The most interesting change is that now taxpayers can contribute to their RRSP for 2 more years until age 71. Most of my clients DO NOT want to be working when they are 71. The government really wants to encourage people to save for their retirement. One has to ask why.

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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